How Big of a Threat Is Fintech to the Banking Industry?

In his most recent letter to shareholders, JPMorgan Chase (JPM 1.94%) CEO Jamie Dimon said not only that fintech is a major competitive threat to the banking industry, but also that excessive reliance on fintech disruptors isn't a good thing for the financial system. In this Fool Live video clip, recorded on April 12, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss Dimon's comments and what they mean to investors. 

Matt Frankel: So, I think the biggest takeaway from our point of view is his thoughts about fintech.

Jason Moser: Yeah.

Frankel: Basically, he pointed out that over the past 10 to 20 years, fintech has just become such a disruptive force in the financial industry. Just to name a couple of things he said, private credit, meaning the credit, loans, and things like that, that happened outside the banking system, have gone from $7.6 trillion in 2000 to $18.4 trillion in 2020, that's well over double. All these fintech lenders they're making personal loans and you can get an auto loan without going through a bank now and things like that. The market cap of public and private fintech companies is roughly $800 billion right now.

Moser: Wow.

Frankel: It was a negligible amount in 2010, just 10 years ago, 10 years before the end of last year. It was negligible, like it was listed as zero in the letter. This is good and bad. Dimon views this as an enormous competitive threat to banks and he should. He absolutely should. I mean, how much business do you think banks have lost because of companies like say Lending Club (LC 2.40%)?

Moser: Quite a margin. It's got even worse.

Frankel: Or SoFi, or Square (SQ 1.68%), or PayPal (PYPL 1.41%). I mean, Square Capital, the business lending side of the business. Square now they are bank. They've just recently became a bank, but they weren't.

Moser: Yeah.

Frankel: They made billions of dollars of loans without a banking charter. That took money away from banks like JPMorgan. Dimon views this as a negative trend in a way. Take that with a grain of salt, he's somewhat biased.

Moser: Negative for whom? [laughs].

Frankel: Right. But he's trying to say that it's negative for the market and the economy and the consumer.

Moser: Yeah.

Frankel: The traditional banking system, especially large banks, it uses more stable sources of credit. As I mentioned earlier, he was CEO of JPMorgan Chase during the financial crisis. During a time like that, who was loaning money to consumers? Credit definitely dried up a little bit, but the big banks were still making loans. I mean, my parents bought a house in 2009, had no trouble getting a mortgage. They went with a big bank to do it. The entire credit cycle, there's a history of just big banks being the providers of credit to the market. That you can really especially make that case now that after the financial crisis, banks are required to maintain such high capital levels and really take care to be able to survive any type of recession. I mentioned during COVID, there was another level of stress tests that was applied to the bank to see how they would do.

Moser: Yeah, absolutely.

Frankel: If you remember that, in a really adverse scenario. Fintechs aren't subject to that. Who's to say that, I mean, PayPal and Square are their own little animal. But one of these start-up lenders or the fintechs that are just getting into the growth mode. Who's to say that they would survive a terrible downturn?

Moser: I think you make a really good point there. One worth digging into because if you recall, in the letter, he put out this chart that compared banks versus fintech and non-banks, and he was comparing the regulatory requirements. I wanted to get into that with you a little bit, because on the one hand, a lot of the services and companies that are being born from this fintech movement are really encouraging. This is a really amazing time from a number of different perspectives. It's opening up all sorts of different avenues in the world of finance, particularly for consumers that we haven't seen really ever. If you think about a lot of these fintechs, you look at Square, you look at PayPal.

Let's take PayPal, for example. PayPal being a company, they partner with a financial institution. They partner with Synchrony Bank (SYF 1.40%), for example, in order to be able to underwrite lending in certain cases and whatnot. Square, like you said, until they actually got their bank charter, that was a little bit of a different animal altogether. But the idea basically that when you are a bank you'll be holding to capital regulations, capital ratios that just simply don't exist for fintechs and non-banks. I would recommend anyone just to take a look at that chart in that letter, because it's just food for thought. I think it can help shape the conversation of how you feel like the space may evolve in the coming years. Because while I love the convenience and the innovation from a lot of these fintechs, I also ask myself the questions, if we run into some sort of protracted downturn, these fintech companies, they really don't have any of these regulatory requirements they have to worry about. There's no liquidity requirements, there's no real operational risk, capital right there, they don't have the same capital requirements, less costly regulations. It just makes you wonder. There is a place in the world for banks that fintechs and non-banks can't really fully fill. They can't fill that void that banks are currently filling here.