By John M. Pachkowski, J.D.
The Federal Reserve Bank of Atlanta has published an article as part of its online publication Economy Matters examining the issues surrounding the relationship between banks and fintech companies.
The article entitled “Fintech Companies: Banks' Allies or Rivals?,” which was written by Robert Canova, a senior policy analyst in the Atlanta Fed's Supervision and Regulation Division, noted that “tension is slowly creeping into the banking world as fintech firms increase their foothold in a more important part of the financial industry sector.” He added, “banks see competition from fintech firms as the biggest threat facing the banking industry.”
What is fintech? For purposes of the article, the definition of “fintech” has evolved from just those companies that developed software that was seen as “disruptive” to any company, either start-up or established, that develops software used in providing financial services. The activities that fall into the fintech spectrum include: crowdfunding, peer-to-peer lenders, and payments, as well as providing data collection, credit scoring, and cybersecurity.
Given the universe of fintech companies, Canova observed that it was easier to discuss fintech “in terms of whether it's an ally or rival to the banking industry.”
Allies. Fintech companies act as strategic allies to the banking industry in several ways with many banks having had long relationships with a few large firms that now fall into the fintech definition. In addition, some bank are using newer fintech companies as technology vendors and avoiding competition with larger banks or other fintech companies in adopting new technology. Finally some banks are entering into strategic partnerships.
Rivals. On the flip, many fintech companies are still perceived as rivals since they offer technology-based services that dramatically reduce overall friction and difficulty in the transactional process that are “highly desired by customers, especially younger ones.”
Greater scrutiny. Regardless of being considered an ally or rival, Canova noted that it is “only a matter of time” before fintech companies face greater scrutiny from regulators. For example, The Clearing House, a trade association of the 24 largest banks, noted that there was an overall lack of consumer regulations applicable to fintech firms that often leave their customers more vulnerable than a typical bank would.
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