Facebooktwittergoogle_pluspinterestlinkedinmailFacebooktwittergoogle_pluspinterestlinkedinmail

They say necessity is the mother of invention. The fallout from the Great Recession taught us many lessons, and the need to reform many areas of banking and finance were realized, most notably within the U.S. with the Dodd-Frank Act of 2010. Dodd-Frank, whose mandate is “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes”[i] represents the greatest regulatory changes since the 1930’s. At which point, numerous pieces of legislation were created as a result of the Great Depression (i.e. the creation of the FDIC, the Securities Act of 1933, and Glass-Stegall Act to name a few). As a downstream result, risk management has been elevated to greater heights, and banks have become more stringent around lending. This has opened the door to alternative lending, which FinTech has marched through.

FinTech is not replacing banking. Let’s be clear about that. It is, however, disrupting the traditional financial services model. With bank’s lending being scrutinized more heavily than ever, and capital infusion more difficult to acquire, especially for small- and medium-sized businesses (SMBs), many SMBs have gravitated towards FinTech for lending: “Data from FDIC-insured institutions shows that the proportion of commercial and industrial loans under $1 million (used to measure small business lending) has fallen to 21% of all commercial loans from a peak of 34% before the “credit crunch.”[ii] The lending crunch has not only affected SMBs, either. It has equally impacted the individual consumer — especially those in the lower tax brackets (lowest 30%). Together, SMBs and lower-income consumers are seeking lending sources beyond typical banks, and this is where FinTech companies are beginning to truly make their mark.

FinTech companies operate as peer-to-peer lenders. Peer-to-peer lending (P2P) is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. They enjoy the ability to more nimbly respond to the uniquely individual needs of those seeking capital by opting in (online) to more detailed and integrated information, which improves the decision-making process and risk mitigation. This has traditionally been a challenge for loan decision process of larger institutions around SMBs. Part of the reason for the greater agility of FinTech lenders is that they are not (yet) bogged down by regulations endured by banks that can often bottleneck the loan process. They also seem to have better, more targeted usage of online data aggregation pertaining to applicant information throughout the loan application process, resulting in not only better data, but also better targeting of customer outreach and accessibility to individual loan seekers.

In 2014 the Federal Reserve Bank of NY estimated that $12 billion has been invested in FinTech, and this number continues to rise. And many of the titans in banking are responding. Goldman Sachs suffered a massive Q1 2016 decline in profits of $1.14 billion — (60%) down from the same period last year. The company has gravitated to the idea that, while still clearly a dominant force, they must evolve and keep pace with times. The powerful institutional bank business model is expanding and will now be offering consumer banking, and buttressing these efforts with what they hope to be enticing online banking — the hallmark of the FinTech value proposition. Citigroup has also recently launched Citi Fin Tech, with a mandate to improve its mobile capabilities around client services, particularly for borrowing and investing. Stephen Bird, CEO of Citi Global Consumer Banking, stated the following:

“”The world’s consumers have converted to mobile, and competitors are everywhere,” he said. “We must act boldly to prepare our business for this new environment and the future opportunities of an ‘always on’ world. Today, we are taking a bold step in the Revolution of our business model.”[iii]

Beyond SMBs, FinTech lending has the potential to appeal to demographics that experience difficulties in access to capital. As mentioned, there is an existing opportunity to better serve lower income, less “attractive” loan applicants. FinTech has the ability (and more frequently the willingness) to service this sector, but the potentially higher risk for default is a valid concern by the P2P lender. Additionally, FinTech lending is often perceived as an additionally viable alternative by tech-savvy millennials who are a driving force, and early adopters, of mobile tech commerce. Between millennials, and SMBs, there is mounting evidence of the growing penetration of FinTech lending. In fact, “…nearly one in five credit-seeking small businesses surveyed in the first half of 2014 applied for funding through an online lender, according to a Federal Reserve Bank of New York survey.”[iv]

In summary, banking is still here and it’s here to stay. But like other industries, financial services (especially lending and payments) is evolving. There is expanding opportunity with advancements in technology, as well as changes in the regulatory environment. FinTech represents the fruition of many of these changes and is a burgeoning opportunity for new players, the old guard, and different verticals to all get involved in financial services and lending.


 

[i] “Dodd–Frank Wall Street Reform and Consumer Protection Act (Enrolled Final Version – HR 4173)” (PDF). THOMAS. Retrieved July 20, 2010.

[ii]The FinTech Revolution and the Future of Small Business Lending” Rohit Arora, Forbes Magazine.  July 23, 2015

[iii]Citi Launches FinTech Unit to Lead Mobile-First ‘Revolution’”  Tanaya Macheel, American Banker. October 16, 2015

[iv]The FinTech Revolution and the Future of Small Business Lending” Rohit Arora, Forbes Magazine.  July 23, 2015

Facebooktwittergoogle_pluspinterestlinkedinmailFacebooktwittergoogle_pluspinterestlinkedinmail
Subscribe To Our Newsletter Today and Receive the Latest Content From Our Team!

Subscribe To Our Newsletter Today and Receive the Latest Content From Our Team!

You have Successfully Subscribed!