Incumbents, take note: New financial services marketplaces are now high-impact models

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Marketplace lending continues to evolve, with agile firms operating at lower costs and innovating with technology at their core.

It wasn’t long ago, that customers relied on traditional banks for most of their financial needs. Now, however, both technology innovation and customer expectations are rapidly evolving. Today, FinTechs and challenger banks offer eager-for-change customers a range of convenient and direct new options.

Incumbent financial institutions can no longer rely on solutions that worked in the past. Since the 2008 financial crisis, banks have struggled with low-interest rates, declining revenues, customer distrust, waning loyalty, and rising expenses.

Ever-changing regulatory compliance mandates are squeezing bank capital and keeping executives up at night. Legacy systems compound these challenges as most stop-gap infrastructure investments are incompatible with the latest technologies. Rigid legacy systems lack scalability and cannot process in real time.

These days customers expect financial institutions to engage seamlessly across touchpoints – branch, call center, internet, or mobile. The seamless engagement has become table stakes vital to attracting prospects and boosting customer loyalty.

Through innovative use of technologies, FinTech firms offer friction-free, cost-effective, personalized products that are significantly raising customer expectations and putting pressure on established financial services (FS) firms. FinTechs have been targeting industry niche areas with superior products and services to fill customer journey gaps ignored by incumbents.

FinTech firms have penetrated nearly every FS segment, driving both innovation and disruption. New age challengers have focused particular interest in digital payments (PayTech), lending (LendTech), fully-digital insurance (InsurTech), banking (BankTech), wealth management services (WealthTech), and financial marketplaces.

Marketplace lending rides the disruption wave

Designed as a two-sided platform structure, marketplace lending offers innovation for both borrowers and investors. Borrowers benefit from a streamlined online application process that uses low-cost information technology to collect standardized information broadly from dispersed individual borrowers. Marketplace lending allows investors to directly screen borrowers, which enables continuous and tailored exposure to an asset class they didn’t have previously.

Marketplace lending is growing fast. More widespread digitization and emerging technologies are helping marketplace lenders to evaluate and process loans quickly and seamlessly. Nimble alternate lenders rely on digital savvy to lower their operating costs and pass savings to borrowers through lower interest rates. Most marketplace lenders do not maintain physical branches, which enables them to price loans aggressively.

Marketplace lending investments are on the rise

Marketplace lending investments | Capgemini

Source: Capgemini Financial Services Analysis, 2019; Capgemini Commercial Banking Top Trends report, 2019

Marketplace lenders use complex technology-based algorithms to assess customers’ credit profiles and underwrite loan applications quickly. They also leverage alternative data – such as social media photos and check-ins, e-commerce and online purchases, mobile data, bill payments, and even GPS data – to arrive at a credit score.

Atlanta-based online lender LendingPoint, which raised $600m of debt funding in 2017, uses dozens of application programming interfaces (APIs) to gather thousands of data points on each borrower. Proprietary risk models enable the FinTech firm to draw a complete financial picture of applicants and approve individuals that traditional lenders may have overlooked.[1]

Lending Club and Prosper are pioneering peer-to-peer (P2P) marketplace lenders in the United States. Lending Club launched its fifth-generation credit-scoring model in late 2017 that leverages more than a decade of its proprietary data, artificial intelligence, and machine learning.[2] Prosper loans are unsecured notes not tied to any asset. A FICO score of 640 or higher is required for loans that may be used for nearly any purpose – including debt consolidation and home improvements – as long as it is stated in the application.[3]

The continued growth of marketplace lending has driven incumbents to reinvent lending offerings around price, service, and strategy. Banks have started to take notice and invest in marketplace lending. For instance, German banking and financial services company Commerzbank launched an online marketplace lending platform that lets small and medium-sized businesses pitch to investors.[4]

Is collaboration the way forward?

More and more incumbents seem inclined to collaborate with FinTech firms to fill gaps they cannot address on their own. Through collaboration, mutual needs are identified, and strengths swapped for a mutually-beneficial win-win situation.

Collaboration: A win-win situation

Marketplace lending investments | Capgemini

Source: Capgemini Financial Services Analysis, 2019; Capgemini World FinTech Report, 2018

Atlanta-based online FinTech firm Kabbage partnered with incumbents Scotiabank (for streamlining online lending), MasterCard (for providing business loans through MasterCard’s network of acquirers), ING (to provide capital to small businesses), and Santander (for offering loans to small and medium enterprises).[5] Lending Club, one of the industry’s largest online consumer lenders, partnered with a series of banks that provided lending capital as part of Lending Club’s P2P investor base.[6]

Collaboration is not a short-term relationship, but multi-faceted and evolving. It is important for participating firms to understand what it takes to sustain a successful partnership and to anticipate, and then address, concerns or challenges to effectively prepare a comprehensive strategy.

To learn more about marketplace lending or the future of banking, reach out to me via social media.

[1] Fintech Global, “Global Marketplace Lending investment on track to surpass funding levels from last year,” September 18, 2018, https://fintech.global/global-marketplace-lending-investment-on-track-to-surpass-funding-levels-from-last-year/.

[2] CB Insights, “Lending Club Shakes Off Talk of Competition, Focuses on Innovation,” May 9, 2018, https://www.cbinsights.com/research/lending-club-innovation-competition-earnings-transcript-expert-intelligence.

[3] Investor Junkie, “Prosper Review 2019 – Is It Worth a Second Look?” Larry Ludwig, August 10, 2018, https://investorjunkie.com/peer-to-peer-lending/prosper-review/.

[4] Knowis website blog, “Corporate Banking – Lagging Behind in Digital Revolution,” Tobias Baumgarten, July 12, 2018, https://www.knowis.com/blog/corporate-banking-the-laggard-of-the-digital-revolution.

[5] Kabbage website, https://www.kabbage.com, accessed April 2019.

[6] Lending Times, “Why Community Banks and Fintech Partnerships Make Cents,” Allen Taylor, June 13, 2018, https://lending-times.com/2018/06/13/why-community-banks-and-fintech-partnerships-make-cents.

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