The Hot Disruptor "Fintech" Could "Disrupt" a Lot of Investors Before It Puts a Single Bank Out of Business

There is a genuine revolution going on, and there is a way to cash in, but it's not what you think...

"The advance of financial technology, or fintech, is going to mean the end of banking as we know it."

I have been hearing that chestnut since I started going to bank and technology conferences over 10 years ago. The young entrepreneurs were thrilled at the prospect of eliminating those stuffy old bankers once and for all with whizz-bang smartphone technology that handled deposits, made payments, and processed loans in the palm of your hand.

I would talk to bankers who were terrified those kids just might be right, and that technology would bury them.

But I never bought into any of it. My stock reply was not to worry, because in a year or two these scruffy young "geniuses" would get a haircut... and come begging for a partnership or vendor relationship with your bank.

It's just downright silly to think the rise of fintech will make banks obsolete.

That's because one of America's stalwart financial institutions won't let it happen anytime soon...
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The FDIC Is the Knight in Shining Armor for American Banks

Quite simply, American banks are spoiled, and that's all thanks to the Federal Deposit Insurance Corporation (FDIC).

If our bankers do something stupid and blow up the bank, we have the FDIC ride in on a white horse and give us our money back. If your bank gets robbed or hacked, and all the money is gone, we still get our money back.
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The bankers may foolishly make a bet on a horse that needs a cab to get to the finish line, but when it comes to our big bucks, we want the FDIC. We don't want any chance of losing our nest egg because someone did something incredibly stupid.

Naturally, the government has kept the disruptive fintech sector under a microscope. There's been talk for several years within the Office of the Comptroller of the Currency (OCC) about establishing a special fintech charter that would let online lenders and payment processors function like normal banks.

It's a horrible idea that won't change much of anything. It definitely won't help fintech eliminate good old-fashioned banks, and that much is true for a number of reasons.

First and foremost, the fintech charter - which has been highly contentious within the OCC over the last year or so - doesn't come with FDIC insurance. That obviously means customers at these fintech firms put themselves at an extreme risk if the firms lose their money via a hack or other malicious attack.

Second, to operate like a bank under an OCC Charter, you will have to be regulated and supervised like a bank.

As with most up-and-coming tech firms sprouting from the lawless libertarian land of Silicon Valley, I seriously doubt few, if any, fintech companies will jump on board with that willingly, especially when it comes with costs and fees.

The markets are particularly abuzz with fintech mania right now following online lender GreenSky LLC's (Nasdaq: GSKY) successful IPO last month. The deal is more or less seen as a gauge of investor interest in the sector overall, and of course, when Wall Street banks see easy money, they'll jump on it like ravenous wolves.

More fintech unicorns, like SoFi, Prosper, and CreditKarma, are waiting in the wings to see if IPO activity surges. If it does, the sector could be the Next Big Thing for a short period.

But we need to consider the endgame of getting caught up in the Next Big Thing.

That's because all of this reminds me of the biggest Next Big Thing in the history of Next Big Things.

It's one that devastated the entire market, with many stocks still recovering from it to this day...

This Historic Market Craze Was Eerily Similar to Fintech

The rise of the Internet was undoubtedly the most important craze in market history.

Back in the mid-to-late 1990s, everyone rightly predicted the Internet was going to change the world. Investors needed to get in on it right away at any price to make money. Internet-related IPOs ensued, hitting the markets well before the ink on the prospectus was dry.

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I knew a broker who worked at one of the biggest Internet investing firms at the time. Demand was so intense that she required customers to deposit $500,000 in an account and generate several thousand dollars of commissions before she would put them in the IPO queue for even a paltry 100 shares.

Thousands of Internet and tech IPOs dominated the market landscape in the 1990s, and most of those companies are gone today. has become the cautionary tale for the dangers of overhyped and financially vacuous IPOs.

Yes, some of those companies did survive, but most were either acquired by bigger competitors or just disappeared altogether. Picking the losers from the winners was a crapshoot, and that's clear from the fact that Inc. (Nasdaq: AMZN) went from death row to being the biggest tech firm in the United States.

Even if you did pick a winner, there was a genuine danger of paying way too much for shares. Investors who were first to realize in 2000 - 18 and a half years ago, if you're counting - that Cisco Systems Inc. (Nasdaq: CSCO) would soon dominate the networking market still haven't regained the highs seen right before the bubble burst.

I have no doubts that fintech will be significant, but most of the companies going public won't be around in a decade. Even those that survive will end being purchased by established bank tech firms like Fiserv Inc. (Nasdaq: FISV), IBM Corp. (NYSE: IBM), or Fidelity National Information Services Inc. (NYSE: FIS).

Chasing the Next Big Thing is never a smart strategy.

Rather, it's far more profitable to patiently wait for an opportunity to buy the current market dominators at a bargain price in a market correction or collapse.

In the meantime, I think it's worth buying the banks that either partner with the fintech firms or make the best use of the technology itself.

For example, SunTrust Banks Inc. (NYSE: STI), Regions Financial Corp. (NYSE: RF), and Fifth Third Bancorp (Nasdaq: FITB) all provide loans to recent IPO GreenSky. Those three banks are the real winners in the long term as they collect interest on those loans, setting themselves up to make millions from GreenSky's operations.

Fintech will not replace the banks. Repeat: Fintech will not replace the banks.

Instead, it will just make banks faster, more efficient, and more profitable. That's why owning the banks may be the best strategy for reaping the rewards of the fintech revolution.

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About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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