In the UK, net lending via traditional high street banks has fallen whilst the alternative finance market has more than doubled year-on-year to £1.74 billion in 2014.
Two important factors have driven the impact: the increasing prevalence of technology combined with the internet, and the widespread loss of trust in banks after the GFC.
Post GFC, large banks globally focused on the strategic imperatives of risk management, and adapting to a new regulatory compliance and capital regime. Cost reduction initiatives tackled flat line revenues in a low consumer and business growth environment.
Yet at the same time, the building blocks of the internet of things (IoT) were gaining traction, improving information connectedness, scalability, speed and driving the costs of technology stacks down to levels unheard of ten years ago.
It was only natural that new entrants leveraging technology would set their sights on taking banking services to clients in a relevant and convenient manner.
The credit conundrum
Small businesses globally remain starved of credit and Australia is no different. One issue raised frequently in the small business sector is, “Why is it so hard to get the funds we need to grow our business?”
Of two million SMEs in Australia, 51 per cent have no lending product at all and are typically funded with family loans or credit cards – at rates closer to 25 per cent without generally adjusting pricing to reward lower risk borrowers.
Funding for SMEs globally became constrained during the recession and has stayed at these low levels since: it is more profitable for traditional lenders to make a $2 million loan than a $50,000 one.
A new approach to lending
Even today, most of the technology investment by banks goes into compliance and retooling of core legacy systems rather than user experience and servicing the needs of the client.
“Most mainstream banks simply aren’t using technology smartly enough to deliver the transformation they need. At the same time, some of their pioneering peers have recognised every business is now (or should be) a digital business, and they are starting to position themselves as digital winners.” – Accenture Digital Disruptor Report, Feb 2014.
Market place lenders focus their energies on building a value proposition around the daily tasks of their customers. They are totally focused on:
- Leveraging data to remove friction between the customer and the institution
- Prototyping and constantly evolving every aspect of the customer interaction. Not just optimising the experience but revolutionising it.
- Mobile is a core competency
- Originating clients without the costs of a large branch network
- Being channel agnostic. Simply, they use the channel the customer uses.
- Eliminating the ‘Silo’ mentality and establishing a symbiotic relationship between software developers, executives, business development people and marketing.
- Risk management and compliance monitoring solutions implemented at a level equal to or greater than any mainstream bank, and available in real time with minimal or no human intervention.
The word “disruption” is used so extensively in nearly all industries with many long established conventional incumbents responding in a number of ways.
In some instances, the arguments focus on the differences of the two operating models reducing good strategic discussions to judgement calls on who will survive or who is better.
In my view, we have two operating models that are mirror reflections of each other; and one day the images will fully converge. The only question is the time frame for convergence and the path some of the conventional incumbents will take to get there.
Some may recognise the opportunity to become partners with fintechs and possibly accelerate their path to the digital age.
Others may not. I suspect over time that their cost reduction levers will lose effect and their profits will be subject to the strength of consumer and business confidence.
Convergence is occurring and fast. The perceived differences are reducing in overseas markets.
Australia may be an island but it is not immune to global trends.
Andrew Colliver is the CEO of Banjo Loans, a recently launched online lending platform for SMEs. His background is in banking with his most recent role being Managing Director, Business Performance of Corporate, Institutional & Specialised Banking for NAB. Andrew believes SMEs in Australia deserve better support across the board and that fintech has an important role to play.