Payment apps…and more? How Fintech Threatens Traditional Banking Industry
By Beyond Bi, RBFL Student Editor
Financial technology (“Fintech”) covers technologies that seek to “improve and automate the delivery and use of financial services,” including common peer-to-peer (“P2P”) mobile payment applications such as Paypal and Apple pay and cryptocurrencies such as bitcoin.[1] The global growth of non-cash transactions, blooming adoption of digital wallets, and the success of many fintech apps make e-commerce the new focus of many industry players. In many countries, non-cash exchanges have become the primary method of payment, which not only increases the usage of debit cards and credit cards, but also in the prominence of P2P payment platforms such as Apple pay and Paypal in the States, and Wechatpay and Alipay in China.[2] The banking industry and technology have become more and more intertwined as digital wallets, and mobile banking apps offer innovative solutions to conduct business more efficiently. Statistics show that a great majority of banks in the United States provide mobile banking services that allow their customers to check balances, transfer funds between accounts in the same bank, view statements, pay bills, etc.[3] The number of active users of digital wallets such as Paypal and Apple pay also experienced steady growth from 2010 to 2020 worldwide.[4] This trend of development was even more prominent overseas as China and India took aggressive leaps toward building a non-cash society over digital wallets.
The rapid development of P2P posed a great threat to traditional banking industries. Many government entities, especially that of developing countries, are playing catch-up in promoting mobile payment apps in order to strengthen their financial infrastructure.[5] Banks face pressure from Fintech companies in conducting their core business, such as savings and paying. In countries where financial institutions were scarce, many customers turn to digital wallets such as M-Pesa that offers financial services to users who do not possess a bank account.[6] Successful P2P platforms are not only more popular than banks with customers but also with merchants. Alipay and Wechatpay’s success is not only attributed to their lower transaction fee compared to credit cards but also to lower implementation costs—while credit and debit cards rely on NFC or point-of-sale (“POS”) machines, Alipay and Wechatpay only require a QR code and a phone.[7] Low implementation costs allowed many rural merchants to expand their services; thus, P2P payment apps can potentially be the solution to help the unbanked population in many places in the world, and this could potentially change the picture for the traditional banking industry. In China, where most banks are state-owned, traditional banks still had to take measures to ensure their businesses and fight back against Alipay and Wechatpay’s wild takeover of the P2P payment market.[8]
Moreover, owners of P2P payment apps are making aggressive decisions to step into areas dominated by traditional banks. They are undertaking many roles of the bank, such as offering advisory services, selling financial products, giving out small loans, offering saving incentives, etc.[9] Many payment apps developed their credit lines, and they usually have a lower credit score requirement than conventional credit card companies and a lower limit.[10] Alipay, a mobile payment app in China, attracted more than 300 million users to their credit line, Ant Credit Pay, by offering a flexible credit limit as low as $7 to those users with little to no credit history.[11] Additionally, as fintech companies are at an advantage in utilizing big data to analyze and accommodate consumers’ needs, they may outcompete banks in both the amount and the quality of services provided. The traditional banking industry may need to come up with more innovative solutions and services to suit the markets’ needs in order to retain new customers, and this, indeed, would bring positive energy to the financial market and potentially present more diverse products to consumers.
[1] Julia Kagan, Financial Technology – Fintech, Investopedia (Aug. 28, 2020), https://www.investopedia.com/terms/f/fintech.asp.
[2] Capgemini Research Inst., World Payments Report 30 (2019).
[3] M. Szmigiera, Share of Banks Offering Selected Mobile Banking Functions in the U.S. 2018, Statista (Nov. 27, 2018), https://www.statista.com/statistics/945464/banks-mobile-banking-functions-usa/.
[4] J. Clement, PayPal: Active Registered User Accounts 2010-2020, Statista (Aug. 13, 2020), https://www.statista.com/statistics/218493/paypals-total-active-registered-accounts-from-2010/; J. Clement, Number of Apple Pay Users Worldwide 2016-2019, Statista (Oct. 1, 2020), https://www.statista.com/statistics/911914/number-apple-pay-users/.
[5] Angaj Bhandari, India’s Fintech Revolution: Why and What’s Next?, The Paypers (Apr. 30, 2020), https://thepaypers.com/expert-opinion/indias-fintech-revolution-why-and-whats-next–1242049.
[6] Christian Haddad & Lars Hornuf, The Emergence of the Global Fintech Market: Economic and Technological Determinants, 53 Small Bus. Econ. 81, 84 (2019).
[7] Ian Goss, Kristofer “Kriffy” Perez, & Bee-Lian Quah, Why Hasn’t Apple Pay Replicated Alipay’s Success?, Harv. Bus. Rev. (Sep. 14, 2020), https://hbr.org/2020/09/why-hasnt-apple-pay-replicated-alipays-success.
[8] Qianzhan.com, Wu Da Hang Quxiao Zhuanzhang Shouxufei (五大行取消转账手续费) [The “Big Five” Banks in China Cancelled Cross-bank Service Fee Charges], Sohu.com (Mar. 18, 2016), https://www.sohu.com/a/64110908_114835.
[9] Paypal.com, Products and Services, https://www.paypal.com/us/smarthelp/topic/PRODUCTS_AND_SERVICES (last visited Oct. 11, 2020).
[10] Shannon Vissers, What Is PayPal Credit & How Does It Work?, Merchant Maverick (May 11, 2020), https://www.merchantmaverick.com/paypal-credit-how-it-works/
[11] Stella Yifan Xie, A $7 Credit Limit: Jack Ma’s Ant Lures Hundreds of Millions of Borrowers, Wall Street J. (Dec. 8, 2019), https://www.wsj.com/articles/a-7-credit-limit-jack-mas-ant-lures-hundreds-of-millions-of-borrowers-11575811989