“Silicon Valley Is Coming”…

Digital technologies have been transforming industries over the past several decades, pushing them to a tipping point where they have to make a decision or they will lose all their revenue. For example, the smart phone has revolutionized the user experience of cell phones and completely taken over the cell phone industry. Irving Wladawsky-Berger from the Wall Street Journal believes Financial Technology (FinTech for short) is pushing the banking industry to their tipping point and that they are on the brink of restructuring. FinTech refers to any technology-based innovations that are being used in financial services. Most of these companies are startups that want to disrupt larger companies, but big banks like Citigroup have created their own FinTech divisions to develop new mobile banking services and business models so that they can compete.

Technology tends to transform industries in 3 steps: IT is used to improve the productivity and quality of production processes, distribution occurs rapidly due to the widespread use of the internet, and then the corresponding industry reaches a tipping point when the new technology changes the user experience of their products. For example, Irving refers to the global recorded music industry and how it has lost over half of its revenues in the past two decades and how the drop in newspaper advertising revenue has been even larger. Banks have taken on many new technologies, including: ATM’s, online banking, fraud detection, and mobile apps. However, according to Citibank, “despite all of the investment and continuous speculation about banks facing extinction, only about 1% of North American consumer banking revenue has migrated to new digital models.”

JPMC’s CEO, Jamie Dimon, wrote in his 2015 Shareholder’s letter that “Silicon Valley is coming,”  and that they should be weary of the hundreds of startups coming up with better and faster solutions to many of their practices. Citi’s report explains how China has already passed the “tipping point” and that the top Chinese FinTech companies already have as many, if not more clients than the big banks. They believe that the U.S. and Europe are approaching the tipping point and soon will be over the edge. Although only 1% of North American consumer banking revenue has migrated to new digital models, this is projected to increase to 10% by 2020 and 17% by 2023. Additionally, FinTech investments have increased by ten-fold in the past 5 years, from $1.8 billion to $19 billion and most of this is in the payment area where banks are seeing the most competition from companies like PayPal and Square. Lastly, FinTech is targeting individuals and small and medium enterprises which accounts for about half of banking’s current profit stream.

“Big banks” have had incredible influence for a long time and it is interesting to think about what their downfall would mean for our country. Life without Wall Street is hard to imagine…

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