Banks should ally with fintechs in battle against payday lenders
Bankers who regard payment technology companies such as fintechs as a problem may be missing opportunities.
They are correct that fintechs don’t have the compliance burdens of banks. But that lack of regulation coupled with their typically lean structure and modern lightweight technology, also means they can move faster and reach retail and commercial customers that are not economic for banks.
Alternatives to payday lending are an example. These fintechs provide credit for nonprime customers, such as a recently divorced woman faced with a slew of new expenses. It is pricey credit, but cheaper than payday lenders. Unlike payday lenders, these companies provide credit reporting and reduced rates as a client pays off the loan. Eventually, a successful client qualifies for bank lending and leaves to take advantage of bank interest rates.
In the commercial sphere, banks have found that lenders such as OnBase, Kabbage and P2Binvestor can perform sophisticated underwriting to identify good risks and offer loans in hours or days rather than the weeks or months some traditional banks take. The fintechs offer low-cost intensive servicing, often monitoring borrowers daily rather than monthly.
Banks, with their lower cost of capital, can take over the loan, either on its own platform or continue using the fintech platform for monitoring and servicing. Borrowing companies that start with a fintech for a commercial loan reach a natural inflection point where they qualify for 100 percent bank financing. Through collaboration, banks can assume the loan and use a fintech’s consumer-friendly technology platform, fast decisioning and intensive risk management with low overhead.
In talking to bankers over the last year I have seen that they understand the need to move to new technology. However, they often have long-term contracts with software providers that are running old legacy systems.
As interest rates rise and margins get compressed, bankers have to reduce back-office costs or find an alternative to their own back office as they pursue new, profitable business that they can’t reach with legacy technology.