Jamie Dimon, president and CEO of JPMorgan Chase, listed fintech as one of the “huge competitive threats” to banks in Wednesday’s annual shareholders’ letter.
“Banks … face widespread competition from Silicon Valley, both in the form of fintechs and Big Tech companies,” such as Amazon, Apple, Facebook, Google and Walmart, Dimon wrote, and “this is it. to stay ”.
Fintech companies, in particular, “are making great strides in building both digital and physical banking products and services,” Dimon said. “From loans to payment systems to investments, they have done an excellent job in developing products that are easy to use, intuitive, fast and smart.”
That is partly why “banks are playing a smaller and smaller role in the financial system,” he said.
Fintechs, such as Stripe, Robinhood and PayPal, have seen great growth and success in recent years, which can pose challenges to traditional banks.
While traditional banks have “significant strengths” such as “branding”, economies of scale, profitability and deep roots with their customers, Dimon acknowledged its weaknesses. Things like “inflexible legacy systems”, along with “extended regulations”, can hinder innovation in banks, although they can also make banks a “safer” option for consumers.
However, without such obstacles, fintech companies have managed to thrive, according to Dimon.
“Fintech’s ability to merge social media, use smart data and integrate quickly with other platforms (often without the disadvantages of being a real bank) will help these companies gain significant market share,” he wrote.
“[M]any banking products, such as payments and certain forms of deposits, among others, leave the banking system. In addition, loans in many forms are moving out of the banking system, “Dimon wrote.
Amid the Covid-19 pandemic, in particular, Americans have become more willing to use fintechs, according to a 2020 survey by McKinsey & Company. The consulting firm found that fintechs “lag behind traditional banks in terms of customer confidence”.
Young people in particular serve as a driving force in their adoption: “Gen Z and Millennials had the most fintech accounts in general,” the report said.
However, “a substantial number of Baby Boomers rely on a kind of fintech account, contradicting the general perception that digital tools are exclusively for young people,” according to the report.
Fintech growth has also been spurred by growing interest in cryptocurrency and blockchain technology.
For example, as Ethereum became more popular, DeFi or decentralized finance were introduced to the market.
Decentralized finance, or DeFi, is an emerging segment of the fintech universe that refers to a system of applications aimed at recreating traditional financial instruments with cryptocurrencies.
Through DeFi loans, for example, users can borrow or borrow cryptocurrencies, as you could with fiat money at a bank, and you can earn interest as a lender.
There are, of course, many risks associated with DeFi, including lack of regulation and protection.
The same goes for the rest of the fintech.
“There are serious emerging issues that need to be addressed – and fairly quickly,” Dimon wrote. These include “increasing hidden banking [and] the legal and regulatory status of cryptocurrencies. “
In view of this, Dimon called for government regulations aimed at creating “a level playing field” for banks, fintechs and non-banks (financial institutions without a banking license) alike.
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