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Why fintech is a big threat to banks

Jamie Dimon, chairman and CEO of JPMorgan Chase, cited fintech as one of the “huge competitive threats” to banks in his annual letter to shareholders published Wednesday.

“Banks … face stiff competition from Silicon Valley, both in the form of fintech and large technology companies” such as Amazon, Apple, Facebook, Google and Walmart, writes Dimon, and “this is 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 investments, they’ve done a great job of developing easy-to-use, 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 seen a lot of growth and success in recent years, which can pose challenges for traditional banks.

While traditional banks have “significant strengths” such as “brand, economies of scale, profitability and deep roots with their customers”, Dimon also acknowledges their weaknesses. Things like “inflexible” legacy systems, along with “broad regulations”, can hamper innovation in banks, although they can also make banks a “safer” option for consumers.

And yet, without such obstacles, fintech companies have managed to thrive, according to Dimon.

“Fintech’s ability to integrate social media, use data intelligently and integrate quickly with other platforms (often without the shortcomings of the real bank) will help these companies gain significant market share,” he wrote.

“[M]all banking products, such as payments and some forms of deposits, are withdrawn from the banking system. In addition, lending in many forms is derived from the banking system, “wrote Dimon.

Against the backdrop of the Covid-19 pandemic, Americans in particular are more likely to use fintech, according to a 2020 study by McKinsey & Company. The consulting firm found that fintechs “catch up with traditional banks in terms of customer confidence.”

In particular, young people serve as a driving force in their adoption: “Gen Z and Millennials had the most fintech accounts in general,” the report said.

Still, “a significant number of Baby Boomers rely on some sort of fintech account, contrary to popular belief that digital tools are exclusively for younger people,” the report said.

Fintech’s growth has also been boosted by growing interest in cryptocurrency and blockchain technology.

For example, as Ethereum became more widespread, DeFi or decentralized funding was introduced to the market.

Decentralized financing, or DeFi, is an emerging segment of the fintech universe that refers to a system of applications designed to recreate traditional cryptocurrency financial instruments.

Through a DeFi loan, for example, consumers can borrow or borrow a cryptocurrency, as you could with a 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 emerging issues that need to be addressed – and quite quickly,” Dimon wrote. Among them are “the growth of shadow banking [and] the legal and regulatory status of cryptocurrencies. “

With this in mind, Dimon called for government regulations aimed at creating a “level playing field” for banks, fintech and non-banks (financial institutions without a banking license).

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