A lot has been written about the existential threat that fintech supposedly represents to traditional banks. In one popular narrative, banks are characterized as obsolete dinosaurs, lumbering towards inevitable extinction blinded by their archaic technology and culture. Meanwhile, plucky young fintech firms are solving the consumer issues of the moment with a fraction of the resources, in a fraction of the time. Funding Options is hedging its bets and partnering with incumbents and smaller lenders.

As always, the reality is far more complicated. It’s wishful thinking to assume mainstream banks aren’t preparing for the threat of fintech, although in some cases this seems to mean little more than giving some executives ‘Innovation’ job titles and Apple laptops, and telling them to wear jeans in the office.

An ex-colleague from my banking days, now senior at one of the world’s largest banks, responded to my bullish views on fintech by pointing out that his firm has more developers than most big players in the technology sector. If the core revenues of major banks came under serious threat from fintech, then these enormous technology resources will be deployed accordingly. He finished by inviting fintech to “bring it”.

Also, the immutable laws of financial services will level the playing field. Whether you’re a hundred-year-old bank or a brand-new fintech startup you still have to comply with the regulations in force at that time — even if they were never designed for the internet age.

Equally, if you’re lending money, you still need to get it paid back, not just in good times but also in bad. If you’re asking people to entrust you with their money, they need to have heard of you and to trust in you.

So are the traditional banks lumbering dinosaurs or sleeping fintech giants? How will the battle between old and new finance play out?

The case against traditional banks

Undoubtedly a key weakness of banks is their legacy systems and technical debt. Banks are notorious for their antiquated IT, which often dates from the last century. Overcoming this technical debt is very often an extraordinarily difficult problem to solve — replacing live payments infrastructure is akin to rebuilding a car while it’s moving.

Perhaps the best example of this creaky technology is that some banks are forced to develop modern customer-facing web services on top of third-party scraping technologies, because it’s too complicated to interrogate their own core systems directly. In other words, there are banks out there that can barely access their own data.

Even more fatal than legacy IT systems is legacy culture. Very often, traditional banks are inherently biased against change, which is not surprising when their every attempt at financial innovation seems to end, inevitably, with huge regulatory fines or trading losses. A leading UK regulator memorably commented shortly after the credit crunch that most financial innovation by the banking industry had proven to be “socially useless”.

Another disadvantage is that major banks lean towards a one-size-fits-all approach to customers. When a small business with $500,000 of revenue asks for a $25,000 loan, the banks take a standardized approach, barely seeming to care if they’re lending to a hairdresser, builder, or haulage firm. The financial burden of banks’ outdated processes and infrastructure mean that it’s too expensive to do anything else.

The case against fintech

On the other hand, while fintech might be currently winning the battle of technology, these new challengers often vastly understate the importance of trust in financial services.

It remains to be seen whether Millennials will adopt new internet-led brands for their savings and investments. However, that’s not important right now, as it’s Generation X and Baby Boomers who still hold most of the cash in major western economies — and I’d wager that these consumers will still tend to seek trusted brands for their precious savings.

Equally, new technology-led alternative lenders may be underestimating the value of the banks’ decades of market experience. The recent boom in alternative lending has taken place in the context of extraordinarily benign economic conditions, not least the lowest interest rates in modern history. When the current economic cycle turns, some new lenders will demonstrate their decisive advantage in risk or costs, but some will quickly find that there was a reason long-established banks weren’t competing with them to lend.

Equally, though banks may often deploy outdated technology, they do sit on their customers’ current account transactions, an extraordinarily potent set of data. Banks don’t currently do much with this data goldmine, but that doesn’t mean they can’t.

So who will win?

At the moment fintech is picking off poorly-served niches, sometimes brilliantly. One example is Kabbage, which provides technology-led loans to fast-moving ecommerce businesses for whom traditional bank lending is slow and inflexible.

Equally, roboadvisors like Wealthfront offer automated wealth management aimed at the moderately affluent who don’t qualify for bespoke investment services. These are both great solutions to specific problems, but the question is how big those underserved niches will ultimately prove to be.

In the long term, it’s probable that the biggest driver of financial innovation will be the emergence of application programming interfaces (APIs) that allow fintech providers to build apps on bank account data. These APIs will take away the decisive information advantages held by traditional banking incumbents, and give fintech providers the same quality and quantity of data without the financial overheads like physical branches.

Although fintech may produce its own Uber or Amazon, perhaps it will only be when the likes of Apple or Google turn their huge brands and channels to financial services that we’ll see the dominant banks really beginning to topple. Either way, the emergence of fintech at least forces banks to raise their game in how they serve their customers.