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Here's Why Fintech Has Such an Advantage Over Traditional Banks

By Matthew Frankel, CFP® - Apr 22, 2021 at 8:12AM

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When it comes to growth and innovation, traditional banks are at a major disadvantage.

When discussing fintech disruptors, it is often cited that they have a superior cost structure to traditional banks, due to the lack of branches and other costs of doing business. But there is another big advantage fintechs have that isn't talked about nearly as much: regulation, or the lack thereof. 

In this Fool Live video clip, recorded on April 19, contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss the list of regulatory disadvantages Jamie Dimon recently wrote in his letter to JPMorgan Chase (JPM -0.84%) shareholders and why it's such a major benefit to the fintech industry. 

Matt Frankel: Fintechs have the clear advantage over traditional banks when it comes to regulation right now. If you don't have a banking charter, there's certain things that you don't have to do.

Jason Moser: True.

Frankel: Jamie Dimon in his letter, he made a table with 11 different disadvantages banks have compared to these fintechs.

Moser: Yeah.

Frankel: Just to name a few. I'm not going to read the entire chart. But banks have to buy FDIC insurance to protect depositors. I think you mentioned that you're a Wells Fargo customer, if I'm remembering that right.

Moser: No. We're Bank of America.

Frankel: Bank of America. That's right.

Moser: Yeah.

Frankel: With Bank of America, let's just say they went out of business tomorrow, the money in your savings account is fine.

Moser: Right.

Frankel: Because they have FDIC insurance. FDIC insurance cost JPMorgan $12 billion over the last decade. That's something a fintech doesn't have to have. High capital requirements even on deposits. To get that capital, banks are paying interest on it. Fintechs don't have those capital requirements, they're set by whatever their business dictates.

Moser: Yeah.

Frankel: Lot of liquidity requirements, they have to keep a certain amount of liquid assets on hand. The last thing any bank wants or the banking system wants is people not being able to get their deposits. If you have $1 million in your bank account, you need to be able to walk into a bank and withdraw $1 million in cash if you wanted to. The banking system needs to support that. Not that that's a good idea if you're a financial planner, don't do that. But it needs to be a possibility, otherwise that leads to a panic.

Moser: Yeah.

Frankel: A big cause of the panic of '29 was people couldn't get their money out of banks quickly enough.

Moser: That's right.

Frankel: The big run on the banks. Just regulatory compliance costs that the banks have. I could go on, there's a ton of these listed here. But if you add up all these costs that JPMorgan said they've had that fintechs don't, you're talking just back-of-the-napkin calculation. You're looking at $50 billion of costs that they've had over the past decade that a fintech would not have.

Moser: That significant.

Frankel: That's very significant. What Jamie Dimon says is that we need to really level the playing field. Not that fintech innovations shouldn't be encouraged, he absolutely thinks it should be encouraged. We need innovation, we need better ways to move money around and better ways to lend. That's a big part of a lot of our investment theses that we say here when we talk about our favorite fintech companies, that's a big part of it, is that we need this stuff.

Moser: Yeah.

Frankel: But, the big banks shouldn't be at that much of a disadvantage. We should be encouraging fintech innovation from all sides, including from the traditional banks, is his point of view.

Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Jason Moser has no position in any of the stocks mentioned. Matthew Frankel, CFP owns shares of Bank of America and Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
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Bank of America Corporation Stock Quote
Bank of America Corporation
$36.41 (-0.63%) $0.23
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$46.14 (0.17%) $0.08

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