The Business of Consumer Lending: Moving from Business Innovation to Technology Innovation
Against a backdrop of struggling “first generation” online lending platforms such as Lending Club and Square, the emerging consensus amongst fintech commentators and players at RISE in Hong Kong last week, was that the “second generation” of fintech growth will come from the “tech” part rather than the “fin”. Summarised by WeLab Founder, Simon Loong: we are seeing the end of what was effectively a phase of business innovation in lending, and are now moving into the next phase where innovative technology will come to the fore.
In the lending space especially, financial technology players recognize that the era of kill-the-banks-type disruption is over and that it is being replaced (whether by desire or simple economics) by greater collaboration between technology companies and established financial institutions. Banks are no longer seen as competitors, but instead, as partners or clients.
Fintech companies have begun to see that they simply cannot afford to compete with larger institutions on cost of capital and regulatory infrastructure, and that there are advantages to working with them.
Barry Freeman, Co-Founder of Jimubox, the Chinese fintech marketplace sees fintech as additive, as a catalyst for the financial industry to adapt to better technology. Whilst fintechs will have some short-term arbitrage opportunities particularly with regard to the regulatory environment, e.g. in China, this window is closing.
The message from Kevin Phillips, Head of Corporate Development at Kabbage, was very similar: that Kabbage’s goal was always to be a tech company, but one that would partner with banks to improve the experience a bank customer goes through. Fintech companies are nimbler and are founded to bring better products to market faster than traditional institutions can. Their technology processes data better and enables them to tailor products very specifically for retail and business consumers. It also provides the distinct advantage of being scalable, being able to reach a large target audience very quickly.
Rohit Agarwal, Global Head of Digital Product Management at HSBC, believes fintech companies have served to push or challenge larger institutions to think about problems in different ways, and importantly to put the consumer first, to improve the customer’s user experience. This is why banks like HSBC are looking to hire people to help them think more like startups.
Whether financial innovation is driven by startups or by traditional institutions who are seeing the light, the economic opportunity and imperative is bright as day. 3.5 million new users per month are coming online in South East Asia alone. Tapping into a new generation of internet users, and specifically mobile internet users, is a significant opportunity – especially when that population of users is also, for the most part, unbanked.
This is the market segment increasingly targeted by Chinese companies Creditease and PPDai, who are moving into microfinance or inclusive finance. Market penetration in China is still very low says Ning Tang, Founder of Creditease, and there is abundant opportunity at this end of the spectrum. Risks are high though and the evolving regulatory framework in China will play a key role in building a sustainable environment for lenders – and borrowers - in future.
The other challenge for fintechs when growing in new markets, is how to build confidence in new technology. Transparency and trust are key to building brand recognition and opening the door to broader adoption. This is one reason why the large online marketplace providers and ecommerce giants such as Amazon or Alibaba have been so successful at capturing a growing portion of the payments and short-term lending market.
Neal Cross, Chief Innovation Officer at DBS, believes it is these companies that will be the true disruptors to the financial establishment – and that fintech as we know it will disappear.
In the end, as he put it, banking is still about banking. But finance is a part of a consumer’s life, it needs to become something that happens in the background, to be frictionless.
So who will win the race and who has the stamina to stay the distance?
Venture Capitalists say they still have plenty of cash for investment and appetite for the right opportunities, but there is no question that investors have become more discriminating when investing in startup companies. Frothy global capital markets and big P2P failures in the USA have dented general confidence, with VCs anticipating flat and even down rounds for startups in the next year.
For entrepreneurs, perhaps the best advice came from Nix Nolledo, Chairman and CEO of Xurpas inc, who emphasized the importance of ensuring your business model is sustainable, of focusing on the unit economics and keeping costs to a minimum until you start getting traction.