FinTech, BigTech, and the Future of Banks

Abstract

Banks are unique financial institutions in that they combine the production of liquid claims—that is, demand deposits—with loans. Though banks can replicate most of what FinTech firms can do, FinTech firms benefit from an uneven playing field in that they are less regulated than banks. The uneven playing field enables nonbank FinTech firms to challenge banks in specific product areas where success is not tied to what makes banks unique—namely, their deposit‐gathering abilities and the potential for synergies with borrowers provided by deposits. And although banks’ responses to FinTech have also been hampered by their legacy IT systems and by internal frictions inherent in large diversified firms, FinTech's narrow product offerings and lack of established “franchises” appear to put clear limits on Fintech's ability to displace banks. Unlike Fintech, however, BigTech firms have some advantages that banks will find it harder to replicate, and so they present a much stronger challenge to established banks in two main areas: consumer finance and loans to small firms. And FinTech as well as BigTech are contributing to a trend in which banks are losing a comparative advantage that has derived from having more immediate access to information about parties seeking credit. The extent to which banks succeed in warding off such threats will depend on (1) their ability to make effective—and possibly even better—use of the same information technology now being used by its new competitors, and (2) their success in realizing economies of scale and scope that their nonbank competitors will find hard to match.

Private Equity and Innovations in Blockchain

“…Guo and Liang (2016) discuss some of the initial applications in the banking industry. Stulz (2019) discusses how blockchain and other technology advancements will affect traditional banks. Currently, these services are supported by database systems such as Oracle and MySQL.…”

Regulatory Response to the Rise of Fintech Credit in The Netherlands

“…Technological advances in mobile applications in combination with the ubiquitous smart phones have made online lending more convenient, faster and more accessible (Anagnostopoulos 2018;Alt et al 2018;Ofir and Sadeh 2020). The rising use of big data analytics and machine learning have made automated credit analysis potentially more accurate and scalable (Stulz 2019). The increasing availability of cloud computing offering flexible and cost effective server capacity is lowering the operating cost of online platforms.…”

“…The increasing availability of cloud computing offering flexible and cost effective server capacity is lowering the operating cost of online platforms. In addition, fintech lenders have a structural cost advantage over banks as the market entrants do not have the cost of maintaining a legacy IT and physical infrastructure that has proven to be less and less productive (FSB 2017a;Lu 2018;Anagnostopoulos 2018;Stulz 2019). Fintech lenders also usually have significantly lower cost of regulatory compliance than banks, mainly because-unlike banks-they generally do not accept demand deposits (Claessens et al 2018).…”

“…Especially the so-called millennialswhose role in economic life is growing-are accustomed to conducting transactions online (Anagnostopoulos 2018;FSB 2017a). Moreover, the reduced trust in banks as a result of the Global Financial Crisis has stimulated demand for alternative credit providers (Anagnostopoulos 2018;Alt et al 2018;Stulz 2019;Ofir and Sadeh 2020). Finally, the increasing lower interest rate that banks were offering savers also led to an rise in the willingness to re-allocate savings to the online platforms, as these offer higher returns.…”

Enterprise Modeling: From Digital Transformation to Digital Ubiquity

“…when a car manufacturer collects maintenance data from its customers' vehicles via remote interfaces [3], the digitalization of government services that companies need to interact with, e.g. for filing tax statements electronically [4], or the entire transformation of value chains such as banks operating without any physical presence [5]. This stems on the one hand from internal demands for gaining efficiency by using digital technologies, e.g.…”