As the G20 finance ministers came together in Japan last week, IMF chief Christine Lagarde delivered an ominous warning of an impending disruption to the financial sector, expressing concerns around the infiltration of Big Tech into financial services. Recently, the IMF, along with central banks and traditional financial institutions, all have raised the alarm on the burgeoning fintech industry and how it will transform financial services in the years to come. The marriage of financial services and technology is not new to the 21st century. The Sumerians began experimenting with fintech as far back as 3,000BC, and are believed to be the first civilisation to invent writing in what is now known as the cuneiform script. This language was used primarily for book-keeping as the Sumerians discovered the advantages of recording financial transactions. Archaeologists believe that the first time humans ever used writing was for accounting purposes — they continued to rely on oral traditions for the rest. This was the first truly disruptive technology in the financial industry.
Since then, the industry has evolved and transformed continuously on the back of technology. Credit cards, ATMs, electronic stock trading, online and mobile banking, and e-commerce are all examples of technologies that have disrupted the sector. Each development has brought anxieties and concerns — think credit cards and hyper-consumerism, online banking and hackers, cryptocurrency and the dark web. What makes the latest disruptions to the industry different, perhaps even more alarming, as Lagarde seems to suggest? One of the key reasons is that fintech developments over the last decade have posed an existential threat to traditional banks.
In the wake of the 2008 global financial crisis, customer confidence in big banks was severely shaken by the exposure of their irresponsible and unethical behaviour. The banking sector was irreparably scathed and customers began to search for alternatives for their financial needs. Meanwhile, the big financial institutions were forced to lay off scores of talented workers. This opened the space for the fintech industry to develop as the redundant workforce looked for alternate employment and customers looked for alternate vendors. The fintech industry has since made leaps and bounds, providing many of the same services as traditional banks, but with new technologies and business models. Big Tech, telecom companies and start-ups have been pioneers in this space, disrupting the industry, eating into the existing market share of big banks and successfully infiltrating previously unbanked markets. Easypaisa is one such success story.
Lagarde, in her statement, rightfully directed attention to Big Tech, “who will use their enormous customer bases and deep pockets to offer financial products based on big data and artificial intelligence”. Big Tech poses the greatest threat to traditional banks for several reasons. WhatsApp has over 1.5 billion users. Facebook recently announced a mobile payments feature to WhatsApp, making it, in Zuckerberg’s words, “as easy to send money to someone as it is to send a photo”. As Facebook enters the payments space, it has a value proposition that sets it apart from any bank along with a massive customer base.
Moreover, as Big Tech has become trendy among both prospective employees and customers, traditional banks are increasingly seen as dinosaurs. Big Tech recruits top talent from the world’s top universities, pays highly competitive salaries and invests in creating trendy work experiences. Unbanked customers and younger generations also find it easier to relate to Big Tech, while the world of banks and brick-and-mortar branches seems inaccessible and inefficient. Though banks are paying more attention to digital banking, they are mostly playing catch-up. Finally, the traditional banking industry has always struggled to bring unbanked people into the net, which increasingly forewarns of a future where traditional banks are irrelevant. The Bill and Melinda Gates Foundation estimates that 1.7bn people currently lack access to formal financial services. Digitisation is seen as a key to democratising such services, and Big Tech is far better positioned to provide modern fintech than traditional banks with their legacy IT systems and legacy mentality.
So, considering Lagarde’s warning, is an intervention in the fintech industry needed? Big Tech’s anti-competitive practices must indeed be curbed, and privacy and security concerns around fintech must be addressed. However, regulators must resist succumbing to the powerful lobbying of traditional financial institutions. The fintech industry should be nurtured as a means of modernising financial services and including unbanked populations. If that means the end of traditional banks’ hegemony, it may prove a positive development after all.