Liz Lumley

Fintech’s age of adolescence has arrived. The adult world of JPMorgan beckons. Recent US banking failures have more to do with start-up growing pains than the traditional banking industry.

At the end of this weekend, most of the world woke up to CEO Jamie Dimon and JPMorgan snapping up a mid-sized bank with a wealthy deposit class.

There are many hot takes. One you will see in most reports, including our sister publication the FT, is that America’s largest bank made a pretty good deal. One aspect of this deal that I found amusing is that all of First Republic’s branches in eight US states are now rebranded ‘JPMorgan Chase’ – banks can move pretty fast when they want to. 

One I have yet to see, and one that does and does not hark back to the global banking crisis, is that these traumas are all part of adolescent growing pains of a naïve tech community and nascent fintech sector. (Yes, I chose those words ‘naïve’ and ‘nascent’ deliberately.)

But what does this have to do with the tech industry and fintech, and how does it relate to the 2008 banking crisis? I feel it does, but not in the way the writers of a supermarket tabloid would have you believe. 

During the last banking crisis, 15 years ago, the crux of many issues involved the US housing market – a housing market that was experiencing a downturn, which many of the risk models in use at banks didn’t factor into their calculations. Not realising, or including, the possibility that house prices can go down as well as up, was one of the myriad facepalm moments from 2008 (good times, good times). 

Many view the rise of fintech as a direct result of the loss of trust many felt in the traditional banking sectors at that time. (The availability of open-source computing as well as cheaper and faster ways of developing applications was also a major factor.) New fintech entrepreneurs emerged to provide not only better financial services, but brand-new financial services. 

They were spurred on by books like Zero to One by Peter Thiel that urged start-up founders not to create new platforms, operating systems, or search engines, but to create something new. Something that didn’t compete with existing services but would instead replace them. 

Not being a banker was seen as a positive. After all, look what those ‘so-called’ bankers did to the global economy in 2008. The industry is littered with stories of predatory practices that kept customers in debt, fuelled credit, and failed to serve society. Honestly, the incumbent banking industry didn’t do itself any favours. 

For the tech world, growth was more important than profit. As long as the venture capital money kept flowing, fintech start-ups could churn out applications, grow at ‘rocket ship’ pace, skirt regulations in the name of ‘moving fast and breaking things’, and market obnoxious status items like metal cards as a way of providing a ‘premium service’. 

All of that so-called ‘innovation’ happened in a global environment of low interest rates, with traditional banks watching and cherry-picking the things they sought to imitate. (I see you high street bank – now offering the ability to freeze a lost debit card, my husband thanks you.)  

Just as house prices both rise and fall, so do interest rates. While a global pandemic, the war in Ukraine, and the resulting high inflation probably weren’t on many risk models 10 years ago, the fact of the matter is most of the growth of the tech industry was built on interest rates remaining low – and that environment changed. 

for the most part, general community banks in the US are holding up well

There are some commentators that are looking at how small to mid-sized banks, especially in the US, are surviving the rise in rates. But for the most part, general community banks in the US are holding up well. Most depositors at these banks hold accounts well below the Federal Deposit Insurance Corporation $250,000 threshold. 

The differentiating factor with First Republic, as well as Silicon Valley Bank (SVB) and to a certain extent Signature Bank, is their connection to Silicon Valley-style start-up culture. Their customer base were tech entrepreneurs, who routinely kept large reserves of uninsured deposits in these banks. The businesses, run by the customers of First Republic, were fuelled by a low-interest-rate world. 

The current banking troubles in the US may not be a banking issue at all, but a reckoning with tech culture. 

High interest rates have slowed the growth of the start-up world, and the challenges those changes have imposed have been hard. When money was plentiful, and hockey stick growth was required, investors offered tech companies lots of toys to play with. In 2023, many firms have put away childish things, trimmed staff and silenced the ping pong tables. 

Fintech’s age of adolescence has arrived. The offerings of the likes of SVB or First Republic, with their free cookies and branded merch, no longer suffice. The adult world of JPMorgan – with sober risk models that examine moving house prices and interest rates – beckons.

Liz Lumley is deputy editor of The Banker. Follow her on Twitter @LizLum.

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