Can Banks Compete in the Fintech War? A New Report Offers a Strategy

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Fintech has ascended to a level where it can actually compete with banks. And a new report says community banks are the most at risk from the digital disruptors that are looming to transform the industry. There has been some $20 billion USD of venture capital invested into the fintech world over the past three years, and there will inevitably be an Uber or AirBnB that will change the paradigm of banking, according to the Fintech Americas whitepaper, “Community Banks & the Upcoming Fintech War.”

“Many community banks are losing market share to emerging fintech companies offering banking services to SMEs [small and medium-sized enterprises] at a fraction of the speed, and sometimes cost, of the average community banks, beginning to threaten their viability and survival,” write authors Ray Ruga and Francisco Geller.

One reason community banks are the most vulnerable is simply because there are so many of them. More than 98% of all banks in the United States — 6,160 out of 6,270 — have $10 billion or less in assets, according to Fintech Americas. The sheer volume of small banks means many could disappear, but their size is also a hindrance: with less in assets, they must focus more on core, status-quo operations rather than investing in strategic plans for the future.

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The Nature of the Threat

The future is coming. Fintech Americas notes companies like OnDeck, LendingTree, and SoFi, which generated $5 billion USD in loans in 2014. Others, including Kabbage and Lenddo, use their agile and lean advantages to issue small business loans much more cheaply and then pass those saving to the client. Funding Circle illustrates another big edge: more than half of the startup’s $2 billion USD in loans have been issued outside of traditional banking hours.

It isn’t just Silicon Valley. Latin America, in particular Mexico City, is also racing to create new solutions for consumers in a region where traditional banking is much less entrenched. Around 210 million people still lacked even a bank account as of 2014, according to the World Bank, and even those embedded in the traditional sector still eschew it more than those in North America and Europe. Some 135 million adults in Latin America who do have a bank account still pay their utility bills in cash, for example.

Fintech can change all that, as the institution stated its 2014 report The Opportunities of Digitizing Payments. “The benefits of digital payments go well beyond convenience,” stated the World Bank. “If provided efficiently and effectively, they can transform the financial lives of those who use this technology.”

Some say it isn’t just systems that are changing but the very currency the world uses. They point to Bitcoin or similar blockchain-powered currencies as the revolution that will transform industry. Such a radical future is still far from uncertain, but if it does arrive, fintech will likely lead the way — not small banks.

How to Win the Fintech War

The Fintech Americas report isn’t all gloom and doom. The extinction of small banks isn’t inevitable, but those that want to stay in the game will need to brace for the future and evolve. “Considering the traction of Fintech, community banks will very soon be confronted with a choice: digital disruption or digital enhancement,” write the authors.

In their view, banks must not actually fight a war against fintech but embrace similar concepts. They say this starts by adapting a new mentality and then becoming more proactive in attracting new customers. The days of sitting back and waiting for customers to file up in a line to deposit checks is over. Investing in new platforms and the cloud can bridge this gap for community banks. Improving strategies surrounding Big Data, mobile and — most important of all — cybersecurity will also allow them to fight on even footing.

But simply being defensive and content with current operations is not an option. Fintech Americas says the fight is not just coming — it’s already here. “Community banks sit at the crosshairs of an array of forces that threaten to wipe them off the competitive map,” states the report.

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