Over the past years, provision of credit has been one of banking’s biggest moats.
Large quantities of transaction data, scoring customers for creditworthiness, understanding credit and economic cycles and underwriting are unique assets and skills that banks have built over centuries.
Fintech companies are experimenting and chipping away at the monopoly of banks. Are they?
One of the most exciting areas of fintech innovation in lending is the use of data. Several players are now experimenting with new credit-scoring approaches—ranging from using social network data, spending habits and other users’ digital footprint.
There are even new innovations that don’t require these credit scoring techniques now, peer-to-peer (P2P) lending is possible on the blockchain. P2P lending was worth US$43.16 billion in 2018 and is expected to rise to US$567.3 billion in 2026.
Globally, digital lending companies have successfully captured these three segments - millennials, small businesses, and the underbanked - while adopting several innovative models.
Digital lenders have leveraged innovative business models and technology, enabling them to achieve wider coverage within remote areas, build infrastructure and solve risk management issues that banks typically faced in serving untapped areas of the country. For example, offering simple ways to get loans online, Ant Financial has rapidly become one of the biggest lenders to small businesses in China, and potentially have the biggest public listing in the world.
Locally, in Nigeria, fintech startups like Carbon and Renmoney have adopted alternative credit-scoring systems to provide quick, unsecured, short-term loans to people. And other fintech startups are also offering loans to small businesses with little documentation and collateral.
These fintech companies have some things in common, including acquiring underbanked customers that are unprofitable for banks to serve, securing small-business customers with a software-as-a-service offering while a bank partner supplies the credit. Lots of them also target millennials and the smartphone generation.
Risk-as-a-platform
Digital lenders have been flying mostly under the regulatory radar but most have begun to attain meaningful scale and attract attention. As seen with the Ant Group IPO blocked by Chinese regulators, fintech would face lots of regulatory scrutinies, which could slow down growth and experimentations.
Many of the fintech with “innovative approaches” in the digital lending space have also failed or run out of the resources to keep experimenting on business models. For example, LendingClub, which used to be the market leader in peer-based lending shut down its peer-to-peer platform this year - and the stock has lost more than 90% of its value the last 5 years.
Lending and other financial services are part of the fundamentals of an economy, enabling individuals, businesses, and governments to create and capture value. No doubt digital lending would be a key resource in the modern economy, giving us the ability to borrow money cheaply and efficiently. But for now, an efficient model that also reduces regulatory scrutiny is needed.
For financial technology start-ups, banks, and telecommunications companies, the potential is huge and the good thing is, in most countries, there’s no dominant player yet.