The impact of FinTechs on the financial services sector is old news. The focus today has shifted from disruption to synergy between incumbent institutions and agile, new-age players. Initially, FinTech collaboration was most apparent within retail banking and payments. These days, however, corporate lending and credit also are beginning to transform.
The environment was right for FinTech entry into lending
The financial crisis of 2008–09 left banks spinning – and lending took a backseat in the aftermath as firms concentrated on reassessing their portfolios and balance sheets. Meanwhile, technology adoption grew exponentially. This perfect storm created the conditions for a fertile environment for customer-centric FinTechs to enter the lending arena.
FinTech newcomers offered convenient, customer driven, mobile-first, and cost-effective solutions that addressed current customers’ frictions and market inefficiencies. At first, FinTechs focused on personal lending and peer-to-peer (P2P) models led by firms such as Prosper, LendingClub, and Avant.[1] After initial success, coverage expanded to include small and medium enterprises (SMEs), with FinTechs such as Kabbage making marketspace inroads.[2]
Fast forward to Q3 2018, and FinTech companies are now enthusiastically supported by venture capitalists and able to raise $5.64 billion across 375 deals globally.[3]
However, enormous funding requirements and the complex nature of lending have limited FinTechs’ ability to offer direct loans to corporate clients. But, FinTechs have measurably affected the way banks handle corporate lending. From debt origination to service, collections, and recoveries, FinTechs are emerging as valuable solution providers for banks.
For example, FinTech-devised credit analysis models use the information furnished by borrowers as well as other parameters, such as financial history, peer performance, social media, and data from other third-party sources.
FinTech contributions are not limited to credit evaluation. They can also make banks smarter through predictive analytics, such as forecasting when a client might need funds before the client realizes the need.
Bank/FinTech collaboration synergies
Relationships between banks and FinTechs within the lending space are evolving fast.
Some banks are treating online or alternative lending providers as an emerging asset class and investing in the platform to cash in on the growing potential of this market. Other banks are taking a more collaborative approach to FinTech relationships. A key FinTech strength which makes them attractive to banks is their ability to gather and analyze data to drive decision making. Banks have typically relied on clients’ historical financial data to make a credit decision, but with FinTech services on their side, banks can now more accurately predict the future.
Firms such as Kabbage have access to more than two million live data connections from their borrowers, which helps the Atlanta-based FinTech ascertain debt-holders’ current and future financial health.[4]
FinTechs’ superfast processing and decision-making capabilities also add value for established banks. FinTech firms in P2P and other platform-based lending provide borrowers nearly-instant loan decisions. Data collection and creditworthiness models are run in the background to enable such quick decision making. Loan underwriting is equally efficient. This capability is a huge addition for banks as more and more customers consider real-time service a deal-breaker.
Besides origination and underwriting, FinTechs also add value in loan and collections services. Armed with FinTech digital capabilities, banks can create empowering self-service portals for clients, which reduces dependency on relationship managers. Banks are also streamlining the collection process through automatic payment collection, reminders, levying of charges, etc.
Overall, these services enhance customer delight and operational efficiency while helping banks grow customer engagement and, thus, profitability. In a perfect win-win model, FinTech get access to large set of customer base, allowing them to scale without having to raise huge funding.
The road ahead
While it is difficult to predict who will ultimately dominate the lending space, FinTech participation in lending will surely increase. Change may not come in the form of new FinTech firms as lending is a heavily capital-intensive business, but through partnerships in which banks provide the backing of their balance sheet and ScaleUps focus on data and customer experience. The effective collaboration between large FS institutions and scaleups is the way forward to fulfill corporate clients’ increasing expectations.
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[1] Quartz, “Americans are splurging on personal loans thanks to fintech startups,” John Detrixhe, July 24, 2018, https://qz.com/1334899/personal-loans-are-surging-in-the-us-fueled-by-fintech-startups/
[2] Forbes, “Transforming The Small-Business Lending Customer Experience: Kabbage CEO, Rob Frohwein,” Micah Solomon, August 13, 2018, https://www.forbes.com/sites/micahsolomon/2018/08/13/transforming-the-small-business-lending-customer-experience-kabbage-ceo-rob-frohwein/#7333aa736bab
[3] CB Insights, “Global FinTech Report Q3-2018,” https://rb.ru/media/reports/CB-Insights_Fintech-Report-Q3-2018.pdf, accessed January 2019.
[4] Banking Exchange, “Fintech business lenders evolving: Square, Intuit, OnDeck, and Kabbage look ahead,” Steve Cocheo, April 23, 2018, http://m.bankingexchange.com/news-feed/item/7514-fintech-business-lenders-evolving