Interest in fintech disruption is at an all-time high, but who will be the winners and who the losers is far from clear. Banks themselves have been sending mixed messages. As a particularly high profile example, JP Morgan Chase CEO Jamie Dimon famously raised the alarm when he said in 2014 that fintech challengers “all want to eat our lunch. Every single one of them is going to try”. This year, however, he sounded more sanguine: “It will be a challenge for anyone to be better, faster, cheaper than us.” In the meantime, PWC reported that 95 percent of the bankers that it surveyed “believe that part of their business is at risk of being lost to standalone FinTech companies” – although we do not know which are the concerned banks, how exactly they think their business will be affected, and what they plan to do about it.
Individual bankers’ opinions are one thing, but if a publicly held bank is sufficiently concerned about the fintech threat, it arguably has a responsibility to inform its shareholders about this. In particular, U.S. listed corporations discuss competition in their electronic annual reports (also known as Form 10-K) which are mandated by the Securities and Exchange Commission. So, what do U.S. bank holding companies – of which there are over four hundred – actually say in their 10-Ks about competition from fintech? This is the question my co-authors Sinziana Bunea at the University of Pennsylvania and Benjamin Kogan at FinTxt and I set out to answer. The results surprised us.
First, given that fintech has been increasingly in the news since the financial crisis, we were surprised that the earliest mention of it was only this year – specifically, on February 17th, early on in the filing season. The identity of the first fintech-mentioning bank was also unexpected: Huntington Bank, an important regional bank headquartered in Ohio, but hardly a household name. The subsequent dozen or so filers kept mum about fintech. But on February 23rd, JP Morgan itself acknowledged competition from fintech, and this appears to have opened the floodgates. Over the following week a full ten banks mentioned fintech in their filings for the first time. By the time the dust settled, a group of 14 U.S. banks had explicitly informed their investors that they regarded fintech as a potential threat.
The composition of this 14-bank group is also puzzling. It includes three of the nation’s top-ten banks (JP Morgan, BNY Mellon, and PNC) together with nine regional players with assets in the billions (Beneficial, First Interstate, Horizon, Huntington, Iberiabank, SVB, UMB, Umpqua and Zions) and even two minnows with under a billion dollars in assets (Hamilton and CSB). What do these banks have in common other than being the first ones to officially register their concern over fintech? On the surface of it, not much. To investigate further, we looked at what these banks actually say about fintech in their filings.
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In fact, six of the banks merely mention fintech in a list of different competitor types including other banks, brokerages, insurers, credit card companies, and so on. The list includes five types of competitors for CSB and Umpqua, six for Beneficial, seven for BNY Mellon and Zions, twelve for First Interstate, and an impressive eighteen for JP Morgan (the banks’ wide disagreement about the number of distinct competitive threats they are facing is interesting in itself).
Three of the banks go beyond a simple mention of fintech, although what they say about it is not particularly insightful. Thus, PNC, SVB and UMB go on to note that fintech competitors offer services such as payments and lending.
More intriguingly, two banks evoke less obvious aspects of a possible fintech threat. Horizon appears concerned about “the migration of bank personnel” away from traditional banks and toward their fintech competitors, while Iberiabank warns that competing with fintech on technology “would result in significant costs and increased risks of cyber security attacks”.
Of the remaining two banks, Hamilton Bancorp, by far the smallest and the most recent filer, is almost gushing in its praise of fintech: “They offer user friendly front-end, quick turnaround times for loans and other benefits. While Hamilton is evaluating FinTech companies with the possibility of developing relationships for efficiency in processing and/or as a source of loans and other business, we cannot limit the possibility that our customers or future prospects will work directly with a FinTech company instead.” We may never know what prompted such an outspoken assessment, but the frankness is certainly refreshing.
The prize for the depth of disclosure would have to go the pioneer. Huntington Bancorp, the first-ever U.S. depository institution to mention fintech in its annual report, also goes the furthest in discussing its competitive strategy in this regard: “Financial Technology, or FinTech, startups are emerging in key areas of banking. In response, we are monitoring activity in marketplace lending along with businesses engaged in money transfer, investment advice, and money management tools. Our strategy involves assessing the marketplace, determining our near term plan, while developing a longer term approach to effectively service our existing customers and attract new customers. This includes evaluating which products we develop in-house, as well as evaluating partnership options where applicable.” It will be interesting to see what fruit this strategy will bear – and whether other banks will become as open about their fintech strategies as Huntington.
So, are these fourteen banks indeed particularly vulnerable to fintech competition, as taking the disclosures at face value would suggest, or are they simply more familiar with fintech than their non-fintech-mentioning peers? Looking at the banks’ actions, we find that at least five fall squarely into the latter category, led by the three giants. For example, JP Morgan has launched a residency program for fintech firms, invested in fintech firms such as Motif, and formed a partnership with OnDeck; BNY Mellon has set up fintech innovation centers; and PNC has invested in Digital Asset Holdings, a blockchain technology company. Of the smaller banks, SVB (which stands for “Silicon Valley Bank”) has made equity investments in Lending Club and Nvoicepay and hosts a fintech conference, while Umpqua is establishing a fintech subsidiary in Silicon Valley.
What about the other nine? It’s harder to tell. Which brings us to the question, why is such a disparate group of banks suddenly talking about fintech in their official filings? One possible answer is, in the words of 2016 Nobel Laureate Bob Dylan, “Because something is happening here, but you don’t know what it is”. It is plausible that, uncertain about what is happening and what to do, banks were taking cues from one another, a phenomenon economists colorfully refer to as “herding”. Under this interpretation, once Huntington went first (perhaps prompted by its acquisition of FirstMerit, a 171-year-old rival and neighbor, certainly a thought-provoking event), JP Morgan may not have wanted to be left far behind. Others would then have followed in reaction to JP Morgan’s filing, given that bank’s stature in the industry. However, once it became clear that only a few of the largest banks chose to mention fintech, the others’ proclivity to do so would have been greatly diminished. I stress, though, that the above is only a possible interpretation of what happened.
So what will happen in the next filing season? Will the number of fintech mentioning banks stay the same? Will it double or quadruple? Will the disclosures become more informative? Will some banks copy their wording from others? How will banks’ words correlate with their actions? And, most importantly, will banks’ fintech-related disclosures become a leading indicator for the bank-fintech dynamic?
Watch this space.
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Image: Chris Brown, CC By 2.0