How fintech will eat into banks’ business

“THE DISTINCTIVE function of the banker ‘begins as soon as he uses the money of others’; as long as he uses his own money he is only a capitalist,” wrote Walter Bagehot in 1873, quoting Ricardo. This distinction may seem outdated. Institutional investors (hedge funds, mutual funds, pension funds, private equity) all use other people’s money. Yet Ricardo’s point matters.

Modern institutions are the interface between individuals and their capital. Gains (or losses) are returned to individuals. By investing in this way, people typically deploy their own money, with the fund acting as a mere tool. Banks also use deposits, the money of others, to extend loans. But customers expect to get their deposits back in full: they do not expect to bear the bank’s loan losses in bad years, nor to reap greater rewards in good ones. It is the banks that take both losses and gains.