Expert: Fintech buys of banks pose major threat to industry

The trend of fintech investor groups purchasing small banks is a “game-changer” for the financial industry, said Curtis Carpenter, Hovde Group Senior Managing Director, Oct. 3 during the Bank Holding Company Association’s annual fall seminar in Bloomington, Minn.

Kirk Hovde and Curtis Carpenter (speaking) address the crowd Oct. 3 during the Bank Holding Company Association’s fall seminar in Bloomington, Minn. (Kawar Paw/BankBeat)

Carpenter said fintechs are buying banks to secure FDIC insurance. Though such deals have involved smaller banks so far, Carpenter said those mergers could prove consequential over the long-run as fintechs gain a foothold in the industry. 

Though bank capitalization has reached a record high, the industry’s $1.8 trillion market cap is still less than the $2.42 trillion held by the tech giant Apple alone, noted Hovde Managing Principal Kirk Hovde. Also, bank tangible book values have fallen over the past several years: Fifty-four percent are currently trading under 1.5 times tangible book value, with only 50 above two times tangible book value. Four years ago, 150 banks were trading at above two times tangible book value. 

The emergence of the fintech industry has drawn the attention of the Federal Reserve and industry professionals. The Department of Justice and bank regulators are evaluating their merger and acquisition policies for the first time since 1995. Last year, President Joe Biden issued an executive order calling on the attorney general and heads of federal banking regulatory agencies to update merger guidelines and oversight under the Bank Merger Act and Bank Holding Company Act. 

Federal Reserve Gov. Michelle Bowman said last month that reforms to bank merger guidelines must factor in the modern competitive threats community banks face from credit unions, fintechs and larger banks. She suggested regulators expand their view of market competition, from focusing solely on the deposit market share community banks hold, to include how much of the market share is held by fintechs and larger banks based outside the geographic area.  

Online deposits increased by 42 percent from 2020 to 2021 while deposits at physical branches only grew by approximately 10 percent. The global fintech market, which was valued at $112.5 billion last year, is expected to increase to $332.5 billion by 2028 and expand at a 20 percent annual clip, according to a Vantage Market Research report earlier this year. The booming fintech industry comes as the number of banks contracts at a 5 percent annual rate, Carpenter noted. Though the pace of consolidations has eased, Carpenter expects M&A activity to eventually ramp up.

A number of fintechs have made waves over the last several years, including Varo, which in February 2020 became the first fintech to obtain a national bank charter. Then, fintech Jiko purchased Wadena, Minn.-based Mid-Central Savings Bank in September 2020, and Square opened as a bank in March 2021. Block, the parent company of Square, has expanded beyond payments to offer a digital suite of banking products to small-business customers.

According to a survey of 358 small businesses by American Banker parent company, Arizent,  45 percent said that their banking providers included PayPal. Thirty percent of the respondents said they work with Square, and 43 percent expressed a willingness to do so in the future.  

A 2021 white paper from the banking tech company Velocity Solutions found that community banks needed to develop digital loan platforms to become more competitive with neobanks which “have essentially erased the lines and redrawn them with a whole new set of rules that we have never seen before.” U.S. Bank recently launched an online cash-flow forecasting tool for small businesses with less than $2 million in annual revenue.

Despite the inroads fintechs have made, community banks have been lauded for efficiently distributing Paycheck Protection Program dollars to small businesses. Carpenter said despite the challenging circumstances, community bankers still play a crucial role in the economy and have survived past crises. “You guys are a well-kept secret,” he added.