While fintech firms threaten major financial service providers, research firm Odlum Brown is still betting on the big money
Fintech companies have long been portrayed as the small and nimble vanguard that would conquer the dominant legion of banks, insurers, and wealth managers. Many reports have highlighted upstart tech startups challenging major financial service firms with functions like direct creditor-borrower matching, novel payment networks, and algorithm-driven portfolio management.
However, veteran firms of the financial industry can still end up winning the war, says a recent commentary titled Can Financial Services Weather the Silicon Valley Storm?, published on the Odlum Brown website.
“[M] any financial services have high switching costs,” explains Benjamin Sinclair, CFA, Odlum Brown equity analyst, and author of the piece.
“[N]ew technologies such as online bill payment have made it more inconvenient to switch bank accounts. Other financial services… are based on strongly rooted personal relationships. Meanwhile established payment systems, like Visa and MasterCard, create a classic network effect, in which both merchants and consumers benefit from each other’s presence.”
He further points out that financial institutions have not historically taken such changes lying down. “For example, JPMorgan has established over 100 partnerships with fintech companies. Banks such as Wells Fargo have streamlined their processes for loan applications. Bank of America pledged at the beginning of this year to triple spending on mobile.”
Finally, Sinclair notes that financial services tech has undergone radical changes before, and the big companies have successfully defended their positions. “An interesting example comes from the late 1990s, when online banks were supposedly going to eat the big banks’ lunch. Those online banks have now mostly disappeared.”
Large companies have entrenched positions fortified with advantages such as lower costs, stronger brands, and greater influence. As such, while there are plenty of reasons to take notice of the barbarians at the gate, there are also many reasons to believe that the long-established empire of major financial institutions will not crumble anytime soon.
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