The Disruption Of The Banking Sector Has Already Begun

Wex Inc

The banking industry, traditionally, is slow to change. For decades, these institutions operated primarily without much change. Automation came slowly, mostly back end improvements. Since the world dealt mostly in cash, there was little need to alter this course. Of the changes that took place, from cash to credit/debit cards to online banking, these were transitions that took decades to be fully realized.

This is all getting turned upside down. Fintech started in this sector about 16 years ago and the disruption is already being seen.

Banking only covers about 1.5 billion people in the world. The rest are considered "unbanked" or "underbanked". These people lack the ability to interact with a reliable banking system. For this reason, their economies tend to suffer.

Fintech is starting to cater to these people. Since it does not require the infrastructure that traditonal banking does, it has the ability to spread rapidly. All that is required is a internet connection. One area that is seeing huge growth is China.

Big tech has stepped in where the banks failed. Alibaba processed $8 trillion worth of transactions last year, more than Mastercard and twice the GDP of Germany. The app is available to anyone with a smartphone and is a distruptive force on the banking sector. This is causing the Chinese government to try and slow down the tech giant with new regulations.

Developed countries like the UK are seeing similar results.

Britain’s Revolut has almost two million customers and was recently valued at $1.7 billion. This is about half of some of the larger banks such as TSB Bank Plc. Revolut has no branches while operating completely online. It runs completely on a smartphone or tablet.

The one place this is lagging is in the United States. Because of government regulation, change has been slow compared to the rest of the world. That could be about to change with a number of start ups looking to mimic what is taking place around the world.

Another factor in all of this is the relaxation on banking regulations as they pertain to the larger banks. After the economic collapse of a decade ago, the Congress tightened the reigns on these institutions. President Trump recently pushed, successfully, to have them rolled back.

This could cause the mega banks to embrace the newer adaptations. They could prevent their own demise by applying FinTech to their business model. Since people tend to have a better opinion of FinTech banks than the traditional ones, this could be a way for these entities to reverse the trend.

With most of the world not being served by the banking sector, it is an industry that is primed for disruption. Whether this comes from within the industry itself or from the outside remains to be seen.

The bottom line is we can expect major changes in the way banking is conducted over the next 5 years.

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