FinTechs: Where Are They Now?
Lending to small businesses by FinTechs has been a hot topic. Investors have been investing significant dollars into companies like Lending Club and Prosper. Articles in the past have been predicting the end of traditional banking and lending as we know it. Borrowing money from your phone for business purposes will be the norm. Were these predictions of the end of small business lending by banks accurate?
It was always a little confusing what business problems FinTechs were trying to solve. Was it access to credit for creditworthy borrowers? Was it just-in-time financing needs because businesses can’t plan ahead anymore and they need credit now? Is it a digital customer experience? Are small business credit cards no longer popular? In our culture today, nobody wants to talk to anybody anymore. Is that the same “self-service” issue for would-be borrowers?
Banks have owned “the lending game.” Over the last few years, banks and credit unions have had a wake-up call, as FinTech companies challenge them to think outside of tradition. How we interact with all of our service providers has evolved, and banking must also evolve. We are now seeing banks becoming aware of the digital customer experience and challenging the FinTechs at their own game. Maybe you don’t need to join them to win business?
Banks have been good at the business of assessing risk, and pricing accordingly for taking on that risk. The challenge for banks has always been when they’re the only game in town, lending is done solely on their terms. In the small business and commercial space, that hasn’t always been a great experience for the borrower. Banks haven’t always had the most efficient process to originate small business and commercial credit. Onerous data requirements, lack of clarity on process, and policy that is out dated all contribute to inefficiencies. Competition can obviously change that. Either from inside the industry or from external forces. When advances in policy and process are wrapped around new technology, bankers are learning and delivering a much-improved digital experience. Some are even getting pretty good at it.
What does this all mean for a bank trying to retain and attract new business customers? First and foremost, decide what type of institution you want to be and get good at that. Differentiation is the key. Do you want to compete on price? Rarely do we hear a banker saying they want to be the low cost provider. At the other end of the spectrum, do you want to compete with FinTechs that are promoting “convenience store” based pricing? Go to a convenience store for an item you’d go to another store for and you’re paying a premium for the convenience of buying that item. Segmenting the small business lending process, supported by a specific policy is a starting point no matter which end of the strategy spectrum. You don’t have to jump all the way into the deep end of the pool and use scoring for the small business credits. Product standardization and efficient traditional underwriting supported by technology can deliver an improved small business customer experience. Ultimately, the alignment of policy and process wrapped around technology can result in a digital customer experience that can compete in today’s world.
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Posted on Friday, July 26, 2019 at 11:30 AM
by John Watts