The financial crisis of 2008 has spawned a number of innovations in the world of finance. Cryptocurrency and fintech startups are two of them, but these were preceded by a new wave of online lenders.
The truth is, and it remains so, that the Big Banks failed to respond to the financial crisis in a meaningful way for consumers. They caused the problem, but they remained in denial about the effects on the person in the street who needed access to credit. Furthermore, the banks simply didn’t want to take on more risk. The banks instead of thinking about people, concerned themselves with regulatory challenges and stuck to technology that first saw the light of day in the 1960s.
Online lenders get VC support
Enter the online lenders, supported by venture capitalists who could hear the money dropping into their coffers. Lending money appeared to be an easy and profitable game, however it wasn’t all plain sailing.
Still, online lenders had their customers well figured out: they knew what they wanted and what they didn’t want: they wanted instant access to loans and they didn’t want to visit a physical branch and discuss every detail of their lives with somebody in a suit. That aspect of it all went well.
Online lenders at a disadvantage
However, the economies of lending have been another matter. As fintech expert, Ben Cukier writes, “Loan profitability is driven by the spread (the cost difference between the interest charged on the loan, less the cost of funding those loans), the cost of acquiring the loan, and the default rates of those loans.” From the outset online lenders were at a disadvantage when compared with the traditional banks, because the old-school bankers uses low cost deposits to fund loans. By contrast, the new online lenders had to rely on “raising debt or even more expensive equity,” as Cukier points out..
Enter Big Data
Plus, customers knew the bank brands, whereas the newcomers had to invest a lot in raising brand awareness. But they did have a weapon that the banks did not posses: the newcomers had Big Data. They talked up their Big Data platforms, which use disparate data to better underwrite credit risk in ways common credit scores did not. And, they leveraged this data to target specific consumers on social media, and then used the data they mined from customer behaviour on social media enabled them to dictate borrowing terms.
Fintech is the real financial innovation
This gave the banks a wake-up call, and now bank customers can interact with their banks through apps and even get quick credit approval. Plus the banks offer a range of products, whereas online lenders only offer loans. Then fintech startups came along and offered more help to the big banks. Mark Hookey, CEO of Demyst Data says, “Fintech innovators demonstrated that a data focus matters, however banks can apply that insight at a far greater scale to know their customers and launch new products.”
In the end it is these fintech companies, rather than the online lenders, that offer the promise of a real revolution in lending.