Jamie Dimon, JPMorgan Chase’s chairman and CEO, cited fintech as one of the “huge competition threats” to banks in its annual shareholder letter released on Wednesday.
“Banks … face widespread competition from Silicon Valley, both in the form of fintechs and Big Tech companies,” like Amazon, Apple, Facebook, Google and Walmart, Dimon wrote, and “it’s here to stay.”
In particular, Fintech companies “are making great strides in building both digital and physical banking products and services,” Dimon said. “From loans to payment systems to investment, they have done a great job of developing user-friendly, intuitive, fast and smart products.”
This is partly why “banks are playing an increasingly smaller role in the financial system,” he said.
Fintechs, such as Stripe, Robinhood and PayPal, have experienced a lot of growth and success in recent years, which can present challenges for traditional banks.
While traditional banks have “significant strengths” such as “brand”, economies of scale, profitability and deep roots in their customers, Dimon also acknowledged their weaknesses. Things like “inflexible ‘older systems'” along with “comprehensive rules” can hinder innovation within banks, although they can undoubtedly also make banks a “safer” option for consumers.
Without such obstacles, fintech companies have been able to thrive, according to Dimon.
“Fintech’s ability to merge social media, use data smartly and quickly integrate with other platforms (often without the disadvantages of being a real bank) will help these companies gain significant market share,” he wrote.
“[M]all banking products, e.g. payments and certain types of deposits, move out of the banking system. In addition, lending in many forms moves out of the banking system, ”wrote Dimon.
In the midst of the Covid-19 pandemic, Americans in particular have become more willing to use fintech, according to a 2020 McKinsey & Company survey. The consulting firm found that fintechs “catch up with traditional banks in terms of customer trust.”
Young people in particular act as a driving force in their adoption: “Gen Z and Millennials had the most fintech accounts in general,” the report said.
Yet “a large number of baby boomers are dependent on some sort of fintech account that contradicts the general perception that digital tools are exclusively for younger people,” according to the report.
Fintech’s growth has also been boosted by an increase in interest in cryptocurrency and blockchain technology.
As Ethereum, for example, has become more mainstream, DeFi or decentralized financing has been introduced to the market.
Decentralized financing, or DeFi, is a growing segment of the fintech universe that refers to an application system that aims to recreate traditional financial instruments with cryptocurrency.
Through DeFi lending, users can e.g. Borrow or borrow cryptocurrency, as you could with fiat currency in a bank, and earn interest as a lender.
Of course, there are many risks associated with DeFi, including lack of regulation and protection.
The same goes for the rest of fintech.
“There are serious new issues to be addressed – and fairly quickly,” Dimon wrote. Among these is “growth in shadow banks [and] the legal and regulatory status of cryptocurrencies. “
With this in mind, Dimon called for government regulations aimed at creating “equal terms” for both banks, fintechs and nonbanks (financial institutions without a banking license).
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