Garnet Capital Advisors Blog

As traditional banks and financial technology startups continue their wary evaluation of whether to be partner or rivals - perhaps both - one high-ranking banker has a message for his brick-and-mortar brethren.

Competing in a smartphone-centric world
The chief executive of Royal Bank Canada, Dave McKay, said legacy banks should stop trying to force regulators to stymie Silicon Valley innovators and instead look to improve their own systems to compete. American Banker reported that McKay recently told a panel at an RBC Capital Markets conference that lack of regulation for fintech is not what's hurting established banks.

"No, regulation is not the problem," McKay said. "The biggest barrier to adapting is the incredible legacy systems."

Banks are often saddled with systems nearly a half-century old, McKay said. While that means their processes are sturdy and proven, it leaves them vulnerable in a world where customers want to, in American Banker's phrase, "do everything on their phones." Fintech companies often focus on parts of the financial market not fully serviced by traditional lenders, such as small business loans and riskier mortgages. While there are signs of loosening lending standards at some established banks, post-crisis caution remains the overall theme for traditional banks. 

Fintech shows robust growth but still small in the big picture
McKay argues that despite the enormous growth in fintech, the sector remains small compared to the overall banking market and is definitely "not fundamental to the economy."

That doesn't mean the head of the bank, which boasts a market cap of $89.3 billion and enjoys a position as the 86th most valuable brand in the world, according to Forbes, isn't defending itself from the threat of upstarts. For instance, RBC has a mobile wallet of its own. McKay cites the theory that if customers come to enjoy using non-bank competitors like Apple Pay, the good vibes accrue to Apple, not the bank.

"We are the negative part," said McKay, who is also president of RBC. "We send the bill. We become plumbing in the billing system - that's what I'm worried about. I want our brand in front of the customer."

Regulators wait in the wings
Regulatory actors certainly have their eyes trained on fintech. While the space for now remains unencumbered by the same regulations traditional banks must follow, it's an open question how much longer that state of affairs will remain. Some banking trade groups have already begun to press for more regulation in the rapidly-developing field, while voices like that of McKay say it's still too early. In the long run, though, it's clear that McKay sees innovators having to be brought into the regulatory framework.

At least one highly placed former regulator is encouraging startups and regulators to talk with one another as potential regulations take shape. Raj Date, former deputy director of the Consumer Financial Protection Bureau, told American Banker it was a "very unique and special time in the industry."

"There's a real advantage in building process and technologies from scratch now, than trying to adapt patchwork existing technologies built in a different era," said Date, now a managing partner at venture capital firm Fenway Summer LLC.

Is bloom off the rose for fintech IPOs?
Of course it's a common mistake to believe that prevailing patterns will keep going in their current directions. While the financial press has long been full of the stories about explosive growth in the fintech space, not all signs are positive. Look no further than the recently-scotched initial public offering for marketplace lender loanDepot. The Wall Street Journal reports that the non-bank mortgage lender blamed market conditions for its decision to postpone an IPO at an expected evaluation of up to $2.6 billion.

The WSJ cited it as just the most recent sign of lessening confidence for fintech startups. Others include mobile-payments innovator Square's decision to mount its IPO at more than a third less than the ebullient $6 billion valuation the company had just a year ago. Fintech giants Lending Club and On Deck Capital have seen significant stock price erosion.

A trusted partner in uncertain times
As established banks and marketplace lenders square off - or partner up - in this period of change, banks can rely on trusted advisors like loan sale advisory firm Garnet Capital Advisors, which has decades of experience in the loan sale markets and keeps careful tabs on the evolving fintech sector.