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[...] FinTech companies mostly provide the same services as banks, but in a different and unbundled way. For example, like banks, crowdfunding platforms transform savings into loans and investments. But unlike banks, the information they use is based on big data rather than on long-term relationships; access to services is decentralised through internet platforms; risk and maturity transformation is not carried out as lenders and borrowers (or investors and investment opportunities) are matched directly. There is disintermediation in these cases. However, such pure FinTech unbundled activities have limited scope. For example, it is difficult for platforms to offer clients diversified investment opportunities without keeping part of the risk on their books or otherwise securitising loan portfolios. And it is impossible for them to benefit from maturity and liquidity transformation, as banks do.
Other functions carried out by FinTech companies, such as payment systems (e.g. Apple Pay instead of credit cards), are still supported by banks. Banks lose part of their margins but keep the final interface with their clients, and because of the efficiency of these new systems, they may well expand their range of activities. In such cases, there may be strong complementarities between banks and FinTech companies.
In general, the value chain of banks includes many bundled services and activities. FinTech companies generally focus on one or a few of these activities in an unbundled way. Nonetheless, bundling provides powerful economies of scope. The economics of banking is precisely based on the ability of banks to bundle services like deposits, payments, lending, etc. For this reason, FinTechs will also have to bundle several services if they wish to expand their activities (e.g. for the crowdfunding example above) or integrate their services with those of banks (e.g. for the payment systems described above).
The business model of FinTech companies, therefore, is very likely to gradually converge towards that of banks. As this happens, it is no longer clear that FinTech companies have a neat competitive advantage over banks, apart from the legacy costs that banks face in reorganising their business. Moreover, as FinTech companies expand their range of activities, the scope for regulatory arbitrage – which the much lighter regulation of their activities has granted them so far – will surely decline. There is a negative correlation between the stringency of regulation and the size of investment in FinTech companies. Authors argue that a case by case regulatory approach should be implemented, essentially applying existing regulations on FinTech companies, based on the services they perform. Regulation should be applied when services are offered (of course with an element of proportionality), independently of which institution is carrying them out.
Competition will enhance efficiency and bring in new players, but it will also strengthen the resilient incumbents, those capable of taking on new challenges and playing the new game. Intermediation will partly be carried out in a different way than today— more internet and internet platforms, plus more processing of hard information through big data. But intermediation will remain a crucial function of financial markets. Banks will not disappear. If some do, they will be replaced by other, more efficient ones. The real casualties will not be banking activities, but inefficient (and possibly smaller) banks and banking jobs.