Jamie Dimon, Chairman and CEO of JPMorgan Chase, called fintech one of the “huge competitive threats” to banks in his annual shareholder letter published Wednesday.
“Banks … face extensive competition from Silicon Valley, both in the form of fintechs and Big Tech companies,” such as Amazon, Apple, Facebook, Google and Walmart, Dimon wrote, “that’s here to stay . “
Fintech companies in particular “are making great strides in developing both digital and physical banking products and services,” said Dimon. “From loans to payment systems to investments, they have done a great job developing easy to use, intuitive, fast and smart products.”
This is partly why “banks are playing an increasingly smaller role in the financial system,” he said.
Fintechs, such as Stripe, Robinhood, and PayPal, have seen significant growth and success in recent years, which can be challenging for traditional banks.
While traditional banks have “significant strengths” such as “brand, economies of scale, profitability and deep roots with their customers,” Dimon also recognized their weaknesses. Issues such as ‘inflexible legacy systems’ and ‘extensive regulation’ can hinder innovation within banks, although they can also arguably make banks a ‘safer’ option for consumers.
Still, fintech companies have been able to thrive without such obstacles, Dimon said.
“Fintech’s ability to merge social media, use data intelligently and integrate quickly with other platforms (often without the drawbacks of a real bank) will help these companies gain significant market share,” he wrote.
[M]all banking products, such as payments and certain forms of deposits, disappear from the banking system. In addition, lending is disappearing in many forms from the banking system, ”Dimon wrote.
Especially during the Covid-19 pandemic, Americans have become more willing to use fintechs, according to a 2020 study by McKinsey & Company. The consulting firm found that fintechs “are catching up with traditional banks in terms of customer confidence.”
Young people, in particular, are a driving force behind their adoption: “Generation Z and millennials generally had the most fintech accounts,” the report said.
Still, “a significant number of baby boomers rely on some sort of fintech account, which contradicts the common perception that digital tools are exclusive to younger people,” the report said.
Fintech’s growth has also been fueled by a strong interest in cryptocurrency and blockchain technology.
For example, as Ethereum has become more mainstream, DeFi or decentralized financing has been introduced to the market.
Decentralized Finance, or DeFi, is an emerging segment of the fintech universe that refers to a system of applications aimed at recreating traditional financial instruments with cryptocurrency.
For example, through DeFi loans, users can borrow or borrow cryptocurrency, as you could with fiat currency at a bank, and earn interest as a lender.
There are, of course, many risks associated with DeFi, including the lack of regulation and protection.
The same goes for the rest of fintech.
“There are serious emerging issues that need to be addressed – and quite quickly,” Dimon wrote. This includes “the growth of shadow banking [and] the legal and regulatory status of cryptocurrencies. “
With that in mind, Dimon called for government regulations aimed at creating a “level playing field” for banks, fintechs and non-banks (financial institutions without a banking license).
Checking out: Meet the middle-aged millennial: homeowner, indebted, and 40
Do not miss: JPMorgan CEO Jamie Dimon: People with these traits succeed – ‘not the smartest or hardest worker in the room’