Until a few years ago, receiving loans from traditional banks had been the norm. The rise of third-party lending services debuted within the last fifteen years and began to focus on the customers that did not qualify for traditional loans. Today, almost 9 in 10 Americans are using FinTech apps to manage their financial transactions, beginning to eliminate the need for brick-and-mortar banks.
LendTech has become a growing market in the FinTech world, stirring conversation on the future of traditional banking. As the FinTech sector continues to diversify, what does this mean for LendTech?
Difference between traditional bank and LendTech
Going through traditional banks for loans are most common for small company financing. When using this form of payment, there is a sense of security that comes with this option. This is most common for small companies and are generally paid back in increments over 1-25 years. Traditional banks have an established reputation and can offer a plethora of services that a FinTech company may not.
LendTech has become increasingly popular and made it convenient for consumers to securely get loans and banking services online. These lenders are seen as enablers of financial inclusion, with the ability to give loans to those who may not qualify for traditional loans. This process is mainly automated, which makes for a faster and more accurate decision-making process for the lenders.
This new way of receiving a loan is quicker and more convenient for both borrowers and companies – but at what cost?
Pros and Cons of LendTech and Traditional Banks
For small business loans, many banks offer the best rates of interest that alternative lenders cannot. With interest rates being lower, many businesses turn to banks as their first option for loans. Traditional lenders have the capacity to offer rewards or discounts when bundling products. They are also able to offer bank accounts, merchant services, and business credit cards.
Although they’re the more established route, traditional banks have some drawbacks to them. One being the slow application process. Although there are stricter application requirements, going the traditional route can lead to greater savings on business financing. Even after all documentation has been submitted, the response still be negative for smaller companies.
LendTech has been able to differentiate themselves from traditional banks by providing an expedited loan process and is quickly expanding to offer more services. The utilization of blockchain in some companies has removed the need for third-party verification, providing FinTech’s with greater transparency and trust. The usage of digitalization has allowed many Lending FinTech companies to have lower operating costs.
There are also some drawbacks to LendTech that consumers may face. Many FinTech lending companies have limited ability to compete with banks due to high and unstable funding costs. This has raised questions about the sector’s long-term sustainability. Without the same longevity traditional banks have built up for the last century, there’s a greater risk when working with LendTech companies. Although they have lower operating costs, FinTech’s have found difficulties scaling and becoming profitable. High marketing expenses and customer acquisition rate costs have also hindered the growth of FinTech startups.
How Mobile Payments Help Build Rapport
As smartphones find new ways to be an integral part of everyday activities, FinTech lending is expected to see significant growth. Mobile payments in general have helped many consumers generate a credible financial track record that many LendTech’s can see. The higher use of cashless payments leads to better outcomes in obtaining a loan and benefitting from a lower interest rate and higher loan amount. Cashless payment services offer risk-reducing and information-revealing effects of verifiable payment records. Through a proven track record, borrowers that use cashless payments are less likely to default.
FinTech lending and cashless payments have eliminated the need for many traditional lending practices. The two are self-reinforcing, and suggest an alternative banking model, eliminating the need for balance sheets or face-to-face interactions. Data sharing and open banking have also played a role in improving lending efficiency.
FinTech lenders are becoming more efficient in screening high vs. low-quality borrowers when the borrowers utilize cashless payments. FinTech lenders screen borrowers more efficiently when borrowers use cashless payments that produce transferable and verifiable information. This produces more verifiable information for the lenders. Much like traditional banks, these processes are used to properly screen borrowers.
As this space becomes more competitive, it’s expected that many LendTech companies will find screening from cashless payments necessary for proper screening. A larger use of cashless payments predicts a higher likelihood of loan approval, a lower interest rate, and a higher loan amount, especially for firms of higher credit quality. This synergy provides an economic rationale for open banking, and more broadly for data sharing and a lending model without traditional banking relationships. This ultimately forces potential borrowers to adopt cashless payments for the best outcome.
The Alliance of LendTech and Banks
Weighing the pros and cons of LendTech’s and Traditional Banks, we’re beginning to see the two form partnerships to bring the best lending experience to consumers. The alliance of LendTech companies and traditional banks offers its customers with useful tools and features that usually wouldn’t be available without a major investment. Application program interfaces (APIs) can let third parties to add-on solutions to already established bank platforms.
A digital front-end partnership gives even the smallest community bank to facilitate initial customer authentication, account opening and even loan origination all without the customer having to visit a branch location.
Here are some companies that have already partnered with disruptive LendTech companies.
HSBC and Amount
HSBC is one of the world’s largest banking and financial services organizations. Servicing over 40 million customers worldwide, the company was in need to accommodate to growing LendTech needs. HSBC has recently partnered with FinTech company Amount to launch a digital lending platform. The digital banking company partners with banks and financial institutions to optimize growth opportunities in the modern world of banking.
Kabbage and Upstart
Kabbage and Upstart are two FinTech lenders that are licensing their software to banks. Helping simplifying cash flow management, Kabbage is an innovative data and technology platform for small businesses. Upstart’s AI-based lending has helped to diminish bias that can happen through traditional banking loans. In addition, they are working with banks to give more efficient digital lending options to consumers.
Blend and BMO Harris Bank
Blend’s platform has been designed to transform banking experiences for their customers. In a partnership with BMO Harris Bank, Blend is looking to improve the digital experience for home equity loans and deposit account opening products.
Although relatively new, partnerships like these have brought in questions on the future of LendTech in their business model. We’re expecting to see the implementation of more LendTech and traditional bank alliances.
Recruiting in LendTech
Due to their slow adoption of technological services, traditional banks need assistance from FinTech companies. LendTech is ever-changing and will continue to see more alliances with traditional banks rather than being in constant competition for the market majority. Digital lending has increased outreach through automation, which has led to smaller teams to reach larger populations. This has however created a need for experienced lenders that has the capacity to keep up with current LendTech trends.
Identifying the right FinTech talent is the number one challenge for startups and the lending sector is no different. At Storm2 our team of specialist consultants are experts in matching high-quality talent to the best LendTech institutions worldwide. Do you have a vacancy you would like to discuss? We’d love to get in touch.