The Big Short Redux and FinTech

Abstract

Similar to the Internet, which created a revolution in the ability to communicate quickly and cheaply, FinTech companies are using blockchain and digital wallets to create a revolution in the transfer of value across the world. The literature and blog space to date have indicated that digital wallets could overtake the need for traditional banking. The purpose of this article is to provide further testing on whether FinTech banking companies could overtake the need for traditional banking by evaluating whether the number of deposits at various US commercial banks and the growth of digital wallets have impacted US commercial bank market values over the past two to three years. Results indicate a strong positive relationship between the number of deposits and US commercial bank market values and a strong negative relationship between digital wallet proxy measures and US commercial bank market values from 2017 to 2019. The trends indicate a stable amount of deposit in the US banking system to a slight decline versus a large growth in the digital wallet sphere. Results indicate that digital wallets could create a large decrease in the market value of commercial banks in the future. Such a result would indicate the need to consider carefully how FinTech companies should be included in financial sector indices.

TOPICS: Real assets/alternative investments/private equity, currency

Key Findings

• • The growth in digital wallets in the past several years has been rapid. In comparison, the growth in bank deposit accounts has been rather stagnant.

• • The question is whether digital wallets are a complement to banks or a competitor. Regression results indicate that the number of deposit accounts has a strong positive relationship with bank market value and that digital wallet proxies have a negative relationship. This means the FinTech companies are taking away market value and may be viewed as a competitor.

• • Assuming that digital wallet growth takes away deposits from banks, results indicate that market values of bank may be on the decline. If such a case exists, it would be wise for exchange-traded funds and index companies to incorporate FinTech companies in their funds sooner rather than later. This will help offset the possible withdrawal from pure traditional banking funds.