As per a recent CNBC report (1), In US, fintech companies accounted for 38 percent of all US personal loans in 2018. That’s a revolutionary growth from just 5 percent in 2013. On the other hand, traditional banks’ share of these loans has fallen down to a mere 28 percent that used to be 40 percent in 2013.
Fintechs are surely heading in the right direction and are proving to be real challengers to incumbent banks. One of the biggest factors that differentiate fintechs from traditional banks is that they do not carry a burden of multiple legacy systems that banks often struggle to get rid of. Fintechs have been able to adapt to latest technologies and processes much faster than the banks. Apart from that, banks live with huge silos like silos within different lines of businesses, amongst various channels and even processes. Fintechs being smaller in size leverage data or experiences in one part of the company in the other part much more effectively.
Customer onboarding is a crucial aspect in financial services industry and often leaves long lasting footprint in customers’ minds about how they perceive a financial institution. Fintechs have been revolutionary when it comes to onboarding.
For fintechs, speed with which they can onboard a customer and disburse a loan is the key. Lenders like Sofi and Vola boast of almost real time disbursal of loans with a completely online process. Adaption of online platforms has been one of the biggest enablers for fintechs to gain lightning fast speed. For example, in a peer-to-peer (P2P) lending model, the online platform provides a standardised loan application process and enables direct matching and transacting of borrowers and lenders. The borrowers provide information on their finances and the project for which they seek funding and lenders then review it on the platform. As soon as the borrower and the lender are in agreement, lending contract comes into force directly between them. This is a very fast and low cost design and a win-win for both.
In earlier years, when incumbent banks had below par and cumbersome websites to onboard customers, that were not handheld device friendly, it was much easier for fintechs to win over customers by offering smartphone adaptive apps that could promise a decent user experience (UX). Now, almost every financial institution offers great onboarding UX on their websites and mobile apps. Consequently, fintechs need to offer much more than just a great UX. Hence, most fintechs are very focused on their niche client segment and they build hyper-personalized products, services and experiences for their clientele. For example, Sofi is best known for student loans and has a simple product offering and a great onboarding experience focused on youngsters. Such fintechs are also great in offering customer support by leveraging cutting edge and real time collaboration techniques.
Another critical factor for fintech’s success is strong lead generation mainly due to lower lending rates as compared to traditional banks. Since, these fintechs largely operate out of virtual world and do not have any brick and mortar branches, they are able to keep their operating costs at bay. Also, fintechs are selective and have very innovative underwriting methods. So while banks charge higher rates for the possibility that borrowers won’t pay back their loans, fintech’s unique underwriting process helps ensure their borrowers have a high likelihood of making their payments, which also leads to a lower cost of collections.
Fintechs are known to be efficient and smart in leveraging data and analytics. They generally use linkages with banks to directly authenticate the customers using their net banking credentials. Many fintechs also utilize third party databases, for example Lexis Nexis or Clear in US, Veda in Australia and Aadhar in India for real time customer authentication. Other than that, fintechs leverage a massive number of data points to determine how likely the borrower is to repay the loan. Companies have incorporated data from UPS, Amazon, QuickBooks, Yodlee, Yelp, Facebook, LinkedIn and multiple other sources. Fintechs apply analytical models to create a snapshot of the borrower’s creditworthiness and likelihood of repaying the loan. Fintechs are increasing adapting Artificial Intelligence and more advanced modeling techniques, such as machine learning to supplementing traditional analytics. PayPal has reduced its false fraud alerts to half, by using an AI monitoring system that can identify benign reasons for seemingly bad behaviour.
Fintechs have been particularly innovative and successful at activation and pushing product usage post a customer is onboarded. Robinhood, a US based stock-trading fintech, initially simplified stock trading by offering zero commissions through its easy-to-use mobile app with superlative UX. Later, company launched a premium offering called “Robinhood Gold” and added charges for margin and out-of-hours trading. Similarly, payment wallet PayTM in India has been driving usage effectively by offering great cash back offers on a range of transactions like ticket bookings, electricity payments, school fee payments and so on.
In conclusion, fintechs have made a great start and are pushing incumbent banks to a large extent. The game has just begun and so far it looks like this game doesn’t have any defined rules. In US and Europe we see that fintechs like PayPal and Stripe that focus mainly on online payments are amongst the most successful ones. Whereas, in China, tech giants that have built huge financial ecosystem, have been most successful. An example from Chinese market is Ant Financial built on Alibaba’s e-commerce platform that offers products like Alipay for online payments, Yu’e bao for investments from the Alipay wallet, MYbank for digital banking and lending and so on. I think, with fintechs knocking at their doors, incumbent banks should proactively engage with fintech disruption, whether by building their own capabilities or by partnering or acquiring. What do you think?