Small fintech firms step up challenge to big banks

Smaller fintech startups are continuing to compete with the individual services of bigger banks.

The banking industry is under attack from a swarm of smaller fintech firms who are not looking to usurp their places in the banking industry, but are challenging one of the many services that big banks provide.

Last November, Tom Loverro’s blog post outlined how Wells Fargo was being unbundled by startups, and CB Insights followed this up recently with its own investigation.

The research group found that fintech startups are attacking traditional banks across the whole spectrum of services, from wealth management to small business loan companies, albeit not head on. Instead, each individual service and product a modern bank has to offer is now being challenged by an innovative startup.

Can banks outcompete everyone?

It’s an interesting dilemma, as how can large banks hope to defend their market share against a host of smaller, more creative, startups?

CB Insights wonders: “Are banks going to be out-innovated and lose their edge, not because of their incumbent, large competitors, but because emerging startups inflict upon them a death by a thousand cuts?”

Large financial institutions are finding themselves increasingly constrained by regulatory requirements - a legacy of the financial crisis from 2007 to 2008. Smaller firms can find ways to work around these constraints, allowing them to outcompete banks and offer cheaper services.

Startups such as OnDeck, Lending Club and Kabbage are looking to steal some of the lending business from banks, while the payments industry finds itself competitors from WePay, Venmo and Braintree.

Furthermore, the advance of new technology has the ability to disrupt the industry. Especially as more and more financial services are being controlled by nifty algorithms, taking away the need to consult experts at banks.

It is changes like these that will inevitably be the most dangerous development for banks.

Investment ramping up

Global investment into financial technology is witnessing a boom, as investors see that startups can realise returns much more quickly than other forms of investment.

The amount of money being poured into financial technology companies is expected to reach almost $20 billion this year, nearly double that of 2014’s investment, according to a recent report from MarketResearch.com and Banking Reports. In fact, the report projects total investment in fintech firms to surpass $45 billion by 2020.

Financial technology is a big earner, and it’s no surprise that investors are realising this. It seems that the rise of fintech firms will prove to be unstoppable and will change the landscape of the retail banking industry - unless banks can find a way to offer their services at the same prices of these startups.