Creative Destruction in Banking

TECHNOLOGY AND THE INTERNET are radically changing many industries, and the financial market is no exception. According to CB Insights, more than $12 billion was invested in financial technology startup companies (hereafter, FinTech) in 2014, up from $4 billion in 2013. These non-banking firms threaten to reshape the status quo in the world’s financial markets by changing the way customers and businesses consume financial services, including banking (Moven, Simple); loans and credit to individuals and small businesses (Lending Club, Kabbage); financing for small businesses (BlueVine, Fundbox); wealth management (Betterment, Robinhood); and, of course, payments (PayPal, Venmo). Austrian economist Joseph Schumpeter dubbed the process in which new, innovative products replace outdated ones “creative destruction.” According to Schumpeter, creative destruction results in richer and more productive societies that enjoy higher living standards. These rewards, however, come at a cost: some firms and individuals, typically those that depend on old or outdated products, might be worse off once new products replace the old way of doing things. With FinTech, the ones at risk are conventional banks.