SPECIAL EDITION • THE NEXT NORMAL
Banks See Challenges from Fintech Disruption By Carl White, Federal Reserve Bank of St. Louis
F
intech firms have been labeled “disrupters.” Whether teaming up with financial institutions or going it alone, fintech firms — or neobanks1 — are rapidly gaining market share in several areas formerly dominated by financial institutions, such as payments and consumer loans. In 2013, according to TransUnion data, fintech companies accounted for 5% of the U.S. personal loan market. By 2018, these firms eclipsed banks with a 38% share of this growing market. Banks’ share of personal loans fell from 40% to 28% over the same period, while credit unions’ share declined 10 percentage points to 21%. At the same time, the technological developments that spawned fintech, such as big data and artificial intelligence, have also greatly benefited traditional financial institutions — whether they have contractual relationships with fintech firms or not. Innovation has spurred new products, increased efficiencies and lowered costs for a range of players. From a deposit standpoint, a review of the Federal Deposit Insurance Corp.’s Summary of Deposits shows that in 2019, U.S. banks classified more than 3% of their deposits as “cyber deposits” — those gathered through online-only branches. In 2020, these deposits represented more than 4% of all bank deposits nationwide. This innovation places an additional burden on banks, however, as they are required to uphold the same regulatory standards for their digital bank operations as they do for their traditional operations.
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• July-August 2021
When Is a Bank Not a Bank
Most fintech firms are not — and do not aim to be — fullservice financial institutions. They do not meet the definition of a bank — an institution that takes demand deposits and makes loans. They typically market their narrow range of products to specific market segments, such as students, small-business owners and freelancers. Some seek to serve the under- and unbanked who may not want or need a bank to meet some objectives, such as savings, person-to-person payments and small-dollar loans. These firms frequently partner with traditional financial institutions using a variety of models that benefit both providers. Other fintech firms have modeled themselves more like banks, with some seeking bank or bank-like charters. This trend has prompted some concern about unequal regulation and any resulting competitive advantages nonbank firms might gain. This is especially true of very large companies like Walmart, which filed a trademark application in late March for a venture the company says could offer services such as credit card issuance, financial portfolio analysis and consulting, credit and debit card transaction processing, mobile payments and virtual currency transaction processing.
Issues for Policymakers and Regulators
As competition intensifies and banks continue to lose market share in certain product groups, risks are also moving outside the banking system. While that may seem like good news,
