No one is disrupting banks

Hey!

The largest U.S. banks just reported their fourth quarter and full-year 2024 results. And you know what? Banks are doing really well. This made me realize that, unfortunately, despite almost 30 years of trying, Fintech companies have not disrupted banks. At least, not the big ones.

Yes, there are examples of Fintech companies challenging banks in some areas, but they hardly challenged the key banking model - taking deposits and issuing loans. Until these functions are not disrupted, we cannot talk about Fintech disrupting banks.

Perhaps, disrupting big banks takes more time or even a change in generations of consumers. Or, maybe, banks and Fintech companies will need to learn how to co-exist. In any case, I don’t think the future of the Fintech industry will be boring.

Jevgenijs

p.s. if you have feedback just reply to this email or ping me on X/Twitter

Let’s talk about deposits first. The money center banks survived the “deposit flight”. JPMorgan Chase, Bank of America, Wells Fargo, and Citi all reported, small, but nevertheless growth in retail deposits (consumers and small businesses). Regional banks did well too.

The last few years seemed like a perfect time for Fintech companies to get deposits. First, stimulus money hit bank accounts, with limited ways for people to spend it. Then the Federal Reserve hiked the interest rates, so one could just park deposits in treasuries and still offer an attractive yield to depositors.

SoFi and LendingClub started offering high-yield savings accounts to make people move their money from the incumbents who paid nothing. And the incumbents couldn’t do much about it, as repricing their existing portfolio would have been far more costly than simply letting some depositors leave.

Even more exciting was Cash App teaming up with Wells Fargo (and Wise with Chase) to offer high-yield savings accounts to their customers. The message was “These customers want to bank with us now, so if you want access to their deposits, you will have to pay.” Wells Fargo and Chase needed deposits and paid 4%+ rates (without running a risk of their own customers demanding the same rate).

However…Bank of America still pays 64bps on $942 billion in deposits. Deposits are up, and the rates that the banks pay for these deposits are down. So for how long will Wells Fargo keep paying 4% to Cash App customers? Perhaps, they won’t need deposits from Cash App clients at all?

And what about LendingClub and SoFi? At the end of Q3 2024, LendingClub had $9.5 billion in deposits, and SoFi had $24.4 billion. This is impressive growth, but clearly not a disruption level. Fintech companies had a chance, and they kind of blew it.

But what’s more disappointing is that Fintechs haven’t managed to challenge banks in lending. Again, at least not the big ones. Let’s take credit card lending, which, in my opinion, is the product that should have been disrupted a long time ago.

In 2023, Affirm launched its Affirm Card. This card combines the function of a debit card with BNPL lending, and in theory, could be a challenger to traditional credit cards. Affirm quickly got to 1.4 million Affirm Card cardholders.

Robinhood also launched its Gold card last year offering 3% cash back. Robinhood claims that 2 million people are on the waitlist for this card.

However, in 2024, Amex opened 13 million new card accounts, Chase opened 10 million, Bank of America opened 4 million, and Wells Fargo opened 2.4 million.

JPMorgan finished 2024 with $233 billion in credit card loans (up from $152 billion three years ago), Citigroup with $171 billion (up from $130 billion), and Capital One with $156 billion (up from $108 billion).

Again, the last few years were ideal for building a credit card business as loan balances exploded. The outstanding consumer credit card debt bottomed at around $0.77 trillion at the beginning of 2021, and then rapidly grew to $1.17 trillion at the end of Q3 2024. And Fintech companies did nothing about it.

Don’t get me wrong, Fintech companies achieved a lot! Banks might be losing (or have already lost?) payment acceptance business to Fintech companies. JPMorgan Chase is probably the last big bank weathering competition well, but Stripe and Adyen are quickly catching up.

Also small business lending (and perhaps, even small business banking) will probably be done “by vertically-focused software platforms that focus on creating “operating systems for SMBs” (think Square, Shopify, and Toast). After all, Square is already originating more small business loans than Chase.

Banks might also be losing the cross-border payments business to Wise and Remitly.

…and Ramp and Brex are certainly becoming a force in commercial cards.

…but (and that’s an important but!) big banks have figured out mobile too. Remember? Fintechs (and specifically neobanks) were supposed to win because of better UI/UX. Mobile first / mobile only, all that stuff.

JPMorgan Chase reported 58 million active mobile users in Q4 2024, Bank of America 40 million, and Well Fargo 31 million. How many Fintech companies have this scale? Two: Cash App and PayPal / Venmo.

Yes, the big banks threw billions on catching up with Fintech companies, but they did it while still delivering crazy high profitability. JPMorgan’s Consumer & Community Banking business operates at around 30% ROE. BofA’s Consumer Banking segment operates in mid-twenties ROE.

So, we cannot really say that Fintech companies are disrupting banks, at least the big banks are fine. Fintech companies might be disrupting community banks, but was that the ambition? I am pretty sure investors didn’t pour billions into the Fintech industry to disrupt community banks.

After all, about a dozen or so largest banks (with $250+ in assets) generate 60% of the industry’s profit (and hold 58% of the deposits).

So what will it take for Fintech companies to disrupt big banks? More time? A change in generations? Or perhaps, banks and Fintech companies will need to learn how to co-exist. In any case, I have a feeling that the future of the Fintech industry will be as exciting as its beginnings.

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Cover image source: Bank of America

Disclaimer: Information contained in this newsletter is intended for educational and informational purposes only and should not be considered financial advice. You should do your own research or seek professional advice before making any investment decisions.