This year, expect a far more diversified approach and better user experience to greatly help fintech get over a downbeat 2016.
For web business lenders, 2016 was a rough year.
Two prominent fintech companies saw their market valuations drop. One small-business lender abruptly stopped issuing loans temporarily because of performance issues, while another was forced to turn off. The industry all together faced heightened skepticism about its growth prospects. Taken altogether, it had been an abrupt about-face from the “wild west phase,” when fintech companies seemed poised to dominate the lending market.
Karen Mills, former administrator of the tiny Business Administration, and Brayden McCarthy, Vice President of Technique for Fundera, analyzed the downturn in an operating paper for Harvard Business School. "It would appear that this initial phase of new market activity is arriving at a finish with problems surfacing for leading players such as for example Lending Club, Prosper, and OnDeck," the paper summarized.
I’ve a different view.
Although some lenders stumbled in 2016, I see borrower demand continuing to be strong. Here’s one prediction: Expect an archive year in originations.
Some naysayers project slower growth for online lending. But I really believe this was predicated on an overreaction to last year’s events.
It’s clear if you ask me that the fintech space’s long-term themes are unchanged. The credit gap remains, and fintech companies still give a much-needed service. Plus, they’re doing this in a in an easier way and seamless way than has been open to customers during the past.
Those that reacted to the negativity of 2016 will be surprised. Fintech companies will get over the sector’s downbeat view. Demand and originations will continue steadily to grow. I predict that market sentiment — which is fickle — should come back as confidence returns.
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You will have changes, including one which we’re already seeing.
Many fintech companies began by concentrating on a single need. That could be consumer loans, mortgages, small-business loans or student education loans. We have now see more fintech companies expanding beyond their initial scope to handle multiple needs, and that trend will continue. To put it simply, you will have fewer pure plays.
Today’s fintech businesses either offer more services with their existing bases or expand to other segments and markets. This certainly holds true at BlueVine. In 2016, we went beyond our core product (invoice factoring) and began supplying a flexible business credit line.
That is one lesson fintech companies have discovered from traditional banks. Both are planning regarding customers, not only products. They’re asking: Just how do we offer more services to the same customers or even to new customer segments?
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Modern mainstream lenders don’t believe of individual products. Instead, their people turn to assemble a whole portfolio of services they’ll offer each customer for a whole lifetime. Today’s banks don’t pitch only a checking or checking account — they provide a 401(k) account and a college fund, too. They ask themselves, "Just how do we solve as much of your financial needs as possible?" Fintech companies will observe a similar trend, leading to fewer one-trick ponies.
Fintech will get yourself a boost from a secular trend. More millennials are joining the workforce and eating more services online, including financial services. The generational change favors fintech companies.
The essential factors that drive demand for services remain strong and so are getting even stronger. For instance, traditional banks face enormous challenges with regards to deploying capital to smaller businesses.
There were some improvements, however the typical bank structure means institutions can’t be as efficient in financing companies because so many of the emerging alternative lenders. Actually, some banks have formed partnerships with alternative lenders. This points to a recognition that fintech companies are providing solutions that are better oftentimes than what traditional banks can provide.
Now, to be clear, it’s not that banks don’t employ smart people. It’s that banks are hampered by legacy systems, regulatory requirements and cumbersome processes that prevent them from providing faster, better and innovative services.
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Despite having all of this upside, fintech companies will continue steadily to trail in a single important area: Banks will continue steadily to have an edge on cost. Their scale and usage of capital make it hard for fintech companies to compete unless they, too, begin taking deposits. And once that occurs, a fintech businesses become banks themselves.
My confidence in fintech’s future is founded on another factor. We’re making a dramatic difference in user experience. Amid the skepticism about the industry’s direction, fintech companies continue steadily to revolutionize just how people manage their finances — dramatically improving lives along the way.
If that weren’t true, our industry wouldn’t exist.
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