By Chris Myers for Forbes
It’s no secret that Silicon Valley is always on the lookout for the next big thing. It’s that drive to test, innovate, and explore that keeps the technology sector hurtling forward at breakneck speed.
Fintech (or financial technology) is the new “it” sector, and one that is near and dear to my heart. When my team and I started BodeTree back in 2010, fintech wasn’t the most popular sector for investors and technology pundits. However, over the past few years, everything has changed. According to Citigroup C +0.50%, approximately $19 billion of incremental investment has flowed into the fintech sector over the last year, up from a mere $1.8 billion in 2011.
The hype is now reaching a fevered pitch. Earlier this week, The New York Times NYT +0.74%’ Andrew Ross Sorken published an article about the state of fintech and its relationship with traditional banks. In the article, he argues that some of the more cutting-edge technologies in the market could fall short of their goal of disrupting banking due to acquisitions and partnerships with the very organizations they’re looking to change.
I couldn’t agree more with Sorken’s assessment. The opportunity in fintech is huge, but banks aren’t going anywhere. In fact, the most successful fintech companies will be the ones that learn how to work with banks, rather than try to supplant them.
Fear is opening the door for innovators
Why is fintech so hot right now? I believe it’s because banks are scared. After all, overall public sentiment towards banks continues to be negative post-recession, and not much has changed from a technological perspective over the past twenty years, leaving banks vulnerable to innovators. Citigroup, for example, reports that fintech may be on the cusp of an “Uber moment” that fundamentally changes the industry.
This fear is a powerful motivator, and it is certainly helping fintech companies get their foot in the door of banks. Fear of massive disruption is largely unfounded, but banks are wise to fear the effect of innovators nibbling away at specific elements of their business. This sense of concern and anxiety on behalf of the banks represents an opportunity for incremental innovation in a staid industry.
The death of the banking sector has been greatly exaggerated
The U.S. banking sector is so entrenched and protected that challenging it from the outside is an exercise in futility. It’s highly unlikely that a startup will come around and pose a real threat to the likes of Bank of America BAC +0.23% or Chaseanytime soon.
If you’re gambling on fintech, you’d be wise to remember that the bank is the house. You might have a few wins here or there, but in the end the house always comes out ahead. It all comes down to money—if a fintech player becomes too successful, a bank simply buys them out. That’s what happened to fintech darling Simple, which was acquired by BBVA for $117 million back in 2014. In technology, money talks, and very few entrepreneurs (or investors, for that matter) have the guts to walk away from a major buyout.
The winners will try to make banks better
There is, however, a huge opportunity for entrepreneurs to help change the way banks serve their customers. Consider what it currently takes to get a loan from a mainstream bank. In almost any instance you can count on months of back-and-forth, multiple document requests and an incredible reliance on traditional underwriting practices.
It’s only a matter of time before someone figures out how to improve this decades-old process by helping banks adopt some of the approaches pioneered by organizations like Lending Club , Kabbage, and CAN Capital. The challenge is developing the wherewithal to navigate the archaic and often frustrating internal politics of the banking world. Historically, it has been difficult for small companies to get their foot in the door, but the fear that exists in the banking industry right now is making that process easier.
Fintech is hot, but investors and entrepreneurs alike should remember that banks aren’t going away any time soon. Wise companies don’t bet against the house in the long run. Instead, they learn how to take advantage of opportunities and work alongside the house. The best fintech companies will be the ones that figure out how to make banks better, not destroy them.
Chris Myers is the Cofounder and CEO of BodeTree, a web application designed to help small businesses manage their finances.
The article first appeared in Forbes