Death by a Thousand Cuts – How Fintech Is Disrupting the Banks

The big banks here in Australia have just released very strong results, which is great news for investors. Increasing dividends and share buybacks during a global pandemic show just how strong a position they are in.

However, there is an undercurrent of change brewing that can’t be ignored. In my view, the banks are in the early stages of being disrupted and this process will play out over the next 10 years or so. It’s not going to happen quickly, but the seeds have been planted and new competitors will ultimately change the way bank’s function. Structural change will eventually compress their margins and reduce their market share, starting with their most profitable products.  

Yes, I know they currently make billions of dollars and record profits year after year. That doesn’t matter when it comes to technological change. They are not impervious to disruption and their success over the past 30 years doesn’t make any difference going forward. In fact, their position as high paying dividend stocks that the market seems to love perhaps makes investors all the more complacent.

So here I want to outline my thoughts on how this is starting to happen, specifically to the banks, and to flag it as a very real issue to be aware of in the years ahead. You need to understand the issue early because once it happens it’s too late.  

Fintech (Financial Technology) continues to grow as a sector with thousands of companies emerging across the world. Unlike Amazon in retail, it appears to me that no individual fintech company will singlehandedly disrupt the banks, rather the reality is that collectively they all will. Not the banks themselves, but their individual products. Because of this the disruption to the big banks will play out a little differently.

But we have seen this type of disruption before.

Back in the early 1990’s newspapers were exceptional businesses. Very profitable. The businesses that disrupted them did not create better newspapers. But one by one the newspapers lost their most important revenue streams and core products, their cash cows.

It was death by a thousand cuts.

Back in the 1990’s there was no Seek, no Realestate.com.au, and no Carsales.com. There were only newspapers. As the internet evolved it allowed a new generation of companies to emerge and cherry pick the most profitable parts of the newspaper business. New online marketplaces developed and led to exciting new platforms that would become the leading companies of the next 30 years.

This is how the banks are being disrupted. One by one their most profitable products are being picked off. Afterpay and the buy now pay later sector is just one example. New payment companies such as Square, Stripe and PayPal are another. But there are dozens emerging across all their product lines. They are leaner, nimbler and provide cheaper, more efficient alternatives. 

Technology and the internet especially have been the catalyst for disintermediating markets. Wherever there is an intermediary the internet has created extremely efficient ways to cut the middleman out.

Banks are ultimately intermediaries.

They have done a great job in presenting both sides of the market as separate products ranging from term deposits, cash accounts, credit cards, home loans to personal loans. But really, they are just the middleman between depositors and borrowers. They take a cut from both. It’s a great deal for them.

It can be difficult to be bold on issues that are not obvious right now. This is especially true when the companies concerned appear to be at the peak of their powers and profitability. It is far easier to talk about tech disruption when a company or industry is in the middle of it. At that point though it’s too late for investors and the company share price will reflect the structural problems.

That said we still hold the big banks in our client portfolios, and they are still great businesses. But don’t just blindly follow the crowd. As an investor its far more important to consider disruption before it is obvious to everyone else, and the market factors it in. That process has already started. Although it may take many years to play out you cannot allow yourself to be caught off-guard by the threat nor miss out on the new opportunities that emerge. 


This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.