This year, unforeseen changes have drastically impacted the way people live. This shift has extended to the finance sector where the status quo is being subverted for a changing sentiment on how we deal with money. For the first time ever, the fintech sector has surpassed the valuation of traditional banks after a year of investors heavily favoring the tech-focused startups over big banks.
It is no secret that fintech has gone where traditional banking won’t, having made some of the biggest inroads to innovate in areas big banks have shunned due to financial crises. Spurred by COVID-19 and the rise of consumers preferring smarter, more efficient, more seamless, and mostly cashless services, banks have fallen behind in investment favor. With most countries urging citizens to stay at home, banks could not keep up with the tech-focused innovations offered by a large global market of fintech companies ranging from specific services to full-service offerings.
In 2019, investors funneled more than $53 billion into fintech startups around the world with venture capital firms and celebrities such as Jay-Z, Robert Downey Jr., Kevin Durant, and Will Smith investing large sums in fintech companies. That trend has only risen, and this year sees companies like Square, Visa, PayPal, and MasterCard net a worth of $1.07 trillion. In comparison, the “big six” banks of America are worth less than $900 billion in total.
Banks will have to work fast to supersede the competition posed by fintechs in a market where companies such as cred.ai are pitting credit cards aimed at millennial/Gen Z banking newcomers; low fee buy now pay later services such as Chime are offering transparency not often found at traditional banks; and financial management service giants like PayPal are making borderless payments seamless across merchant and consumer platforms. Recent announcements by Square and Venmo offering early access to wages only stiffens the competition.
Today the market caps for payment stocks such as Visa and MasterCard have surpassed the value of Wall Street’s major banks, even if their balance sheets tally as significantly smaller by comparison. Conversely, the share value of Wall Street Banks is being threatened by increasing loan defaults and low interest rates that are indicative of a troubled economy.
With fintech companies offering digital banking and tools to bypass traditional finance, big banks will have to adapt to stay relevant in the evolving market.