Fintech Versus Banks: Déjà Vu?

Those sounding the death knell of the banking industry at the hands of fintech startups are underestimating the resilience of banks to disruptions.

- Jean Dermine

The recent dismissal of Lending Club CEO, the charismatic French entrepreneur Renaud Laplanche, for allegedly mis-selling loans to a Wall Street bank, caused a media circus about the future of fintech, raising concerns whether these ambitious startups had the right controls in place to keep up with their growth. But the fintech industry was already on shaky ground before this news broke.

Initially dubbed peer-to-peer lending (individuals financing individuals), it has evolved into ‘marketplace funding’ with large institutional investors such as pension and hedge funds, and even banks, making the loans to individuals. After the initial euphoria of its public listing in 2014, Lending Club was trading well below its issue price by January 2016 as it started to lose the interest of institutional lenders due to increasing default rates. Regulators also began paying more attention to the information ‘investors’ were getting about their investments and whether consumers were borrowing at usury rates.

Many claims have been made that mainstream banks could be displaced by peer-to-peer and marketplace lenders, but in a recent paper for Banque de France’s 2016 Financial Stability Review, I point out that it is far from clear that these new players have the expertise and infrastructure to replace the work banks do.