Since bursting onto the scene a few years ago, Fintech lenders have gained market share so quickly that many banks and credit unions are still struggling to adjust to an industry that has quickly transformed itself to consumers.
By the end of 2016, Fintech lenders controlled nearly a third of all personal loan balances, up from 4 percent in 2012 and just 1 percent in 2010, according to TransUnion
. The total market share may be lower in other loan categories, but the growth has been rapid across the board.
Much of that growth reflects the inherent advantages that Fintech lenders have over banks. They’re smaller and nimbler than larger corporations, and they often have fewer regulatory and compliance issues to encumber innovation.
Fintech lenders’ ability to focus on one problem and solve it very well makes them a thorn in the side of traditional banks. Successful Fintech startups have homed in on specific lending areas like unsecured term loans or lines of credit; student debt (refinance or origination); debt consolidation; or the subprime market.
By definition, traditional financial institutions offer full product suites and must cater to existing customers. They typically have a whole set of processes for each product already in place, making it much harder for them to change course around delivery or to even conceive of new products from a completely blank slate.
How banks can compete
Banks do have some advantages, including their reputation and existing relationships with consumers. Those advantages can help, but only if banks are able to price their products in a manner that’s competitive with the Fintech lenders. That can be difficult, given that banks have so much more overhead than lean startups.
In addition to offering rates and fees that are at least in the same ballpark as their startup competitors, banks must also follow Fintech’s lead when it comes to the user experience. Part of the appeal of borrowing from a Fintech lender is the ease with which consumers can apply and get approved for a loan.
In order to compete on both loans and experience, banks need detailed, current research about the Fintech market. They need data on how Fintech lenders are pricing their loans, including the fees and rates broken down by FICO bands. They also must have an understanding of the end-to-end lending process in order to adjust their own process accordingly.
Banks are beginning to adjust to this new lending landscape. Several large brands, including Goldman Sachs and SunTrust have launched their own Fintech startups, which are bringing in new consumers and showing that the best way to compete with the new lenders may be to become one of them.
Another option for big banks is to buy the startups outright. For many founders, an acquisition by a big bank is the ultimate goal. After all, the bigger the startups get, the harder it becomes for them to hold onto the advantages (leanness, fewer regulatory hurdles) that made them so successful in the first place.
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