January 12, 2017
Despite competitive propositions and momentary advantages that alternative lenders may have over incumbents, it is likely that banks will eventually drive this particular FinTech segment out of business. That moment, however, will come after a brief time of mutually beneficial collaborative work that we will witness in the years ahead. Though alternative lenders will get to see growth and prosperity in the short term, the long-term success of this segment is questionable. In fact, the more sophisticated data analytics, regulatory technology and risk management solutions developed by FinTech startups get, the less time is left for alternative lenders to leverage their often overhyped position.
At the moment, banks and alternative lenders make natural allies, bringing to the table strengths of one another while addressing challenges each face in the increasingly complex environment. Combining an easy and quick online application process, fast decision-making, convenience for customer and flexibility of alternative lenders with the scale of institutional lending capacity can make a significant difference for startups, banks and the market structure alike.
However, while there are certain FinTech segments that do appear to have a bright future – such as banking technology companies, advanced security solutions providers, etc. – alternative lenders may soon lose their competitive advantages as banking professionals learn and adopt new technologies and business models. Moreover, startups in other FinTech segments (AI, blockchain, etc.) are actively contributing to the obsolescence of this particular class of companies as they contribute to the accelerated learning and innovation adoption in the formal banking sector.
Alternative lenders at the moment have an upper hand due to the ability to expand the capital reach by accessing the pool of customers willingly or be forcefully ignored by institutional players. The ability to offer a loan in five minutes came as a result of bending the standards of risk assessment and adoption of underwriting techniques that take into account a different set of characteristics.
This particular advantage, however, is perishable. At the moment, an increasing number of institutions tie up with alternative lenders to expand the capital reach and transform their business model in favor of a more cost-efficient strategy. At the moment, those partnerships are highly beneficial for both parties as they offer stability to lenders and new channels to banks.
In those partnerships, banks attain an invaluable knowledge on evolving risk assessment models and expand their vision of customer evaluation techniques, moving further away from traditional FICO-based scoring to more customer-specific, relevant to the new target audience schemes.
Moreover, in partnerships, banks gain access and the ability to adopt best practices in ensuring superior customer experience (which alternative lenders are undeniably far ahead in). An acqui-hire model of interaction will lead talented professionals from FinTech right into the traditional sector to bring out the best from a startup into banking.
In partnerships, institutions will gain better visibility on international expansion strategies, which allowed FinTech startups to shed barriers leveraging technology rather than significant capital infusion and investments in physical infrastructure. Alternative lenders may become cost-effective loan distribution channels for banks and discontinue existing as an alternative to incumbent offerings. For banks, it will signify a business model transformation; while for startups, it will mean the loss of their competitive edge and, at the end, the market need for their existence.
While the expansion of credit access, greater transparency, enhanced speed and superior customer experience expertise slowly flows from FinTech into institutional banking, alternative lenders and banks do make perfect allies.
Multiple partnerships prove those relationships to be important for both parties and beneficial for customers – especially for underserved groups of the population. Partnerships such as Avant and Regions Bank, OnDeck and JPMorgan Chase, Kabbage and Santander, Kabbage and ING, Prosper and Radius Bank, Lending Club and Union Bank, and other industry examples represent a mindset transformation and strategic work in place to learn rather than to invest efforts in competitive strategies.
Partnerships drive a revival of lending for the banking sector, stabilize startups operations and performance, extend credit to new groups of population, and improve the service for existing bank customers. In the long run, financial institutions are the ones to benefit the most simply because of their historically developed and grown capital capacities, often cross-generational ties with customers and a range of other important strengths that will allow them to use those partnerships as a stepping stone to greater market share.