Money 20/20: Fintechs vs Banks 1-0

My first attendance at the Las Vegas annual Money 20/20, you could say, was a professionally rewarding experience. One-on-one meetings, listening to vendors' pitches, making new friends, and enjoying the desert sun this time of year.

From my point of view there was one key takeaway at the conference:

• Fintech is creating new opportunities and challenges, for consumers, financial institutions (banks, brokers, insurers, and so on), and regulators.

In less than two years financial technology firms, propelled by the need for contactless payments and record fundings, a.k.a. greasing the wheel, are rapidly gaining market share from the incumbents - the banks. According to CB Insights recent report, in Q3'21 US fintech firms received $14.6 billion or a 121% yr/yr increase. Globally, there are now 206 "unicorns" compared to just 15 five years ago!

Finding the product-market wedge

Naturally, fintech is gaining on the banks. Focused on smaller, regional markets, providing niche services, and being able to address specific pain points have helped fintech players scale rapidly. It is exactly the strategy embraced by many Scandianaivian players such as Trustly, an open banking payment platform, Lunar, and the 800-pound e-commerce gorilla Klarna. Scandinavia, after all, has an advanced e-commerce system powered by high-speed internet.

Wedging into a vertical has paid great dividends in the US market. Just have a look at the banking-as-a-service (BaaS) where consumers are being offered anything from cash advances and deposits to debit cards and rewards. All digital. Despite the slim profit margins, unless you are Chime with millions of clients, fintech companies are able to collect data, study their clients and continue to sharpen and widen their offerings.

But nowhere else has the competition between financial services and fintech been more fierce than in lending. Over the last four years, the financial services sector as a constituent of the S&P 500 has merely grown. Do you want proof? Read the Q3 earnings report from the largest US bank JPMorgan as average loan balances grew by barely 2%. If it weren't for investment banking and trading, it'd have been a disastrous quarter.

S&P 500 Sector weightings

At the same time, TransUnion data suggests that fintech lenders have 38% of the US consumer lending market, up from just 5% eight years ago. Banks' share of personal loans has fallen from 40% to 28% in the same period of time. Of course, banks and credit unions gave up a decade ago on the non-prime consumers focusing only on prime.

How long will this continue? Is fintech after the prime, banked clients next? It remains to be seen. Let's not forget that banks have deep bench players that could be readily deployed. Trust is the biggest one. At any point in time, when confidence turns to desperation and fear, the banks could score an equalizer and or take the lead very quickly.