I’ve just got back following two days at a FinTech and alternative finance conference called Lendit. In between hobnobbing with the great and the good of the FinTech scene, the keynote speeches and round tables were of great interest as, from past experience, they tend to set the agenda for FinTech trends for the year to come.
Ex-Lending Club CEO Renaud Laplanche, now at Outfit, was characteristically bullish on the FinTech industry. “The growth of online lending will accelerate in the next 15 months,” he said, a statement which is evidenced by the entrance of new players into the online lending market such as Goldman Sachs and its Marcus platform, and Esme business loans from NatWest.
Renaud’s view is that new technologies will help give birth to a Lending 2.0 ecosystem. These technologies include cloud computing, big data and – of course – blockchain technologies. He believes they will help in further reducing operating expenses, which will have the effect of driving down the cost of credit. Underwriting should also be an area which benefits from these technologies.
One of the most interesting themes of the conference was the notion of “rebundling” financial services. The last five or so years in the FinTech world have all been about “unbundling” the services that banks provide – lending, wealth management, payments, FX – with FinTechs trying to own one of those particular services by distributing the product from a lower cost base than the incumbents. Choose one product and do it really well. Think Funding Circle in SME loans, and MarketInvoice in receivables financing.
However, the direction of travel has changed. Many FinTechs have realised that they will never recoup their investments unless they can open up new revenue channels. There are several ways to achieve this – some FinTechs are expanding territorially, others are introducing new product lines, while others advocate a marketplace approach. For instance, Starling Bank (which will soon introduce business bank accounts) only intends to provide current account banking, but will offer a plethora of products from selected partners through its financial products marketplace. What’s not to like with that model? It’s low-risk and fee generative, and providers will be falling over themselves for access. A chance for the business finance community to plug and play perhaps? Although I’m sure many readers may see this as potentially the next mis-selling scandal…
Open banking is an emerging term in financial services/financial technology that refers to the use of open application programming interfaces that enable third party developers to build applications and services around the financial institution. Think providing read-only access to your bank account to a financial services provider in much the same way as you link the latest app you have downloaded to Facebook. PSD2, the new payment services directive, GDPR, the new data protection regulation, and a whole host of government initiatives mean that open banking will become a reality in 2018. While some of the keynote speakers focused on this, I didn’t detect a particular buzz around the opportunities from Lendit conference-goers.
I think this lack of excitement is misguided, as I can see the open banking revolution having a positive impact on the business lending community, and not only because of the new data sources that will become available for the first time. Perhaps, though, the topic is best covered in a future article.
Much was made of artificial intelligence, particularly by Antony Jenkins, the ex-CEO of Barclays who is now heading up banking technology newcomer 10x. This clearly has great potential in the case of large-scale consumer loan credit-decisioning. However, it’s hard to see this having an impact in the short-to-medium-term, as I still think the notion of AI replacing human intervention is a step too far into the work of Philip K Dick for most people. This is especially the case in business finance, where deals are rarely sealed unless the customer has been well and truly eyeballed by someone who has been there, done that, and cleaned up the mess already.
Overall there is an evolution, rather than a revolution, taking place in financial services, and it’s always interesting to see the predictions of those who are running, or have run, large financial institutions.
We’ll just have to wait and see whether the predictions are right and fintech lenders will continue to grow, or if the traditional providers will mount a fightback.
Jonathan’s article is in the October 2017 edition of Business-Money magazine.