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Applied Corporate Finance: The Fed and The Financial System
Applied Corporate Finance: The Fed and The Financial System
N UMB ER 4
FA L L 2 0 1 9
Journal of
APPLIED
CORPORATE FINANCE
IN THIS I SSU E:
System 43
Charles W. Calomiris, Columbia University and The Hoover Institution
n 1994, Bill Gates famously said that banks are dinosaurs. Since then, bank assets
I in the U.S. have more than quadrupled (from $3.7 trillion to $17.4 trillion) while
the number of banks has fallen by more than 50% (from 10,453 to less than 5,000). Today,
we have many fewer, but much larger banks. With the Internet came many efforts to disrupt
the banking industry, including the emergence of online banks. These banks did not supplant
existing banks. Instead, existing banks made online banking available to their customers.
After the global financial crisis, innovations made possible computers extensively and introduced ATMs. In 1992,
by digital technologies led many to claim, once again, that Merton Miller wrote that “No 20-year period has witnessed
banks were on the verge of extinction and about to be replaced such a burst of innovative activity,” while noting that one of
or fundamentally disrupted by FinTech firms. In 2018, for the causes of this burst was “the information revolution, and
example, the Gartner group announced that “digitalization especially in the electronic computer.” But for purposes of
will make most heritage financial firms irrelevant by 2030.”1 this article, there is a more appropriate definition: financial
What is the market saying? Since 2013, when Google innovation that is based on the use of digital technologies and
Trends shows that interest in FinTech took off, until this big data. The use of digital technologies makes it possible to
writing (fall of 2019), the Dow Jones U.S. Banks Index has provide many existing financial services more efficiently and
more than doubled, and more than held its own with respect to enhance these services.
to the S&P 500. But if there is no evidence that the stock BigTech firms are “technology companies with established
market has priced bank stocks as if banks were an endangered presence in the market for digital services.”3 They are firms
species, does this mean that we can ignore FinTech? Does it that have successful digital platforms. In the U.S., they are
represent a competitive threat to banks? Are banks immune firms like Amazon, Facebook, and Google; in China, it is
to disruption? Or is the stock market just confused about the firms like Alibaba and Tencent. The Chinese counterparts
prospects of banks? In this article, I examine how FinTech is of the U.S. firms have already made big inroads in financial
likely to affect the future of banking and banks. services markets—but the U.S. firms have not. The challenges
But first, what do we mean by “FinTech”? Let’s start for banks posed by the entry of BigTech into finance are quite
with the definition adopted by the Financial Stability Board: different from the challenges posed by FinTech firms. The
“technologically enabled financial innovation that could result typical FinTech firm is a specialized firm that challenges a
in new business models, applications, processes, or products specific product line of banks. For instance, a credit FinTech
with an associated material effect on financial markets and firm aims to wrest market share from banks, typically in a
institutions and the provision of financial services.”2 Given specialized segment of the credit market. BigTech firms, by
this definition, one might be tempted to say that the golden contrast, have the ability to challenge banks across a large
age of FinTech was the 1960s, when banks started to use number of product lines; in other words, they can lead a
frontal assault as opposed to attacking niches.
To understand how FinTech and BigTech threaten banks,
*I am grateful for comments from Don Chew, Harry DeAngelo, Mark Johnson, Leandro
Sanz, and Amin Shams. it is important to understand whether there is something
1 “Gartner says digitalization will make most heritage financial firms irrelevant by distinctive or even unique about banks that makes it hard
2030,” press release by Gartner, October 29, 2018.
2 See Financial Stability Board (2017). Full citations are provided in the Refer-
ences at the end of the article. 3 See Frost, Gambacorta, Huang, Shin, and Zbinden (2019).
17 See “The 11 biggest fintech companies in America 2019,” Forbes, February 4, 18 “German fintech N26 appeases regulators as it eyes future IPO,” by Tobias Buck
2019. and Olaf Storbechk, Financial Times, August 14, 2019.
21 See, e.g., DeAngelo and Stulz (2015). 22 Buchak, Matvos, Piskorski, and Seru (2018).
33 Cited in “The Future of Banking: Fintech or Techfin?” by Jim Marous, Forbes, Aug.
27, 2018.
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