The Fintech Revolution is here and it is going to eat your bank.
I hear this at least once a day as I am making the rounds both in the real world and around the Internet. There are all these new startups popping up with new ways to transfer money, pay for stuff, invest in stocks, bonds, commodities, borrow money and even lend money in hopes of a decent rate of return. None of it needs people, and it is going to completely replace banking in our lifetime according to the banking and tech pundits.
That is not going to happen in my lifetime or even my kid's lifetime. I was at a bank conference earlier this year in Dallas and the subject of fintech (aka financial technology) was a hot topic. One of the speakers, Steve Hovde of bank-focused investment and advisory firm Hovde Group, basically said that banks and Fintech companies needed to stop fearing each other and go out in the hall and make friends. He didn't think that bank and Fintech companies can survive without each other, and I agree with him. The successful Fintech companies will be the ones that make traditional banking easier, faster and more efficient.
Let's take a look at Square (SQ) for a minute. Square really is a game changer as the service allows the little guy to take credit card payments. We go to the Mount Dora Art Show every year and I usually end up buying some seascape or pelican-related art to add to my office clutter and 90% of the time I pay with my debit card via Square. It is a big deal, but even Square needs the banks that issue the cards and ultimately process the payment and move the money from me to the artist. I have spent a little time talking with the merchants who use Square, and pretty much all of them are transferring the money from their Square account to their bank at the end of each day.
I have had the same conversation with my millennials. My kids use fintech services such as Venmo to move money around and my daughter in particular is addicted to the Starbucks (SBUX) app that allows her to pay for overpriced fancy coffee via her mobile phone. However, they have these services linked to their bank accounts and credit cards and are not keeping deposits with these companies. The fintech companies make using their bank accounts to pay for stuff easier, but they do not and will not replace the bank in the process.
The biggest factor that will keep fintech from taking over the world is people and the way we think. We may want processing our transaction easier and faster, but we are not going to give up the protection of Federal Deposit Insurance Corp. insurance and governmental regulatory agencies. If there is a problem with our accounts, we want talk to a person, not a user interface. Technology that makes banking easier will do very well, but those that try to replace it will have very little success.
In my opinion, the big winners from the Fintech Revolution will be the existing technology companies that focus on banks. Companies such as IBM (IBM) , Cisco (CSCO) Fiserv (FISV) , First Data (FDC) , Oracle (ORCL) and Unisys (UIS) will be able to identify the fintech products and services that the marketplace is accepting and either acquire those companies or develop a competent service. They then will add that product as a new feature in the tech and IT packages they are offering to banks, credit unions and other financial institutions.
The biggest winner of all will be cybersecurity companies. Every new payment, deposit or lending product that pops up requires a new commitment to cyber security. As we turn our cell phones into wallets, protecting all that cash and data is going to be Job No. 1 for financial services companies.
A successful hacking of a bank or fintech company is going to be a serious reputational hit for the target company, and customers will switch to someone they think can protect their data and funds. Companies such as Unisys with their new Stealth Cybersecurity product and Vasco Data Security International (VDSI) with their authentication products for banks and other financial services companies will the biggest winners form the Fintech Revolution.
Those companies that make banking easier, faster and more profitable will survive. A handful of them will survive and grow to become industry leaders and the rest will be acquired by more established tech companies or fall by the wayside. Banking and banks will still here 100 years and all the new fintech products will just be a part of the way banking works.