Individual consumers and small-mid size businesses need better access to credit. The credit score system in most mature economies is old and outdated. There are myriad new data points that are not factored into modern credit scoring systems. Banks’ ability to meet customer needs are falling behind customer expectations.
A new lending model is needed. Banks and most traditional financial institutions, due to regulations, have a lock-in effect with customers to hold their deposits with FDIC/government guarantees. As a result, they have strict lending standards and cannot meet the needs of a large swath of their customer base, ranging from students’ credit needs, to personal loans, to credit cards, to small businesses that need credit to scale and many more verticals.
Naturally, fintech startups have popped up to solve this unmet need amongst consumers and businesses. Using big data and new lending models, they have issued debt, quite successfully, to these different customer groups. Their problem is scale.
New customer acquisition is expensive and venture capital wants to see aggressive growth. Even if they issue debt successfully, it’s hard to scale a business, profitably, for one-time transactions (taking out a loan).
Enter: traditional financial institutions.
They own customers and their deposits. These companies can also become a facilitator rather than just a lender. They need to create a platform for lending. Financial institutions should connect their customers with third-party lenders that are willing to lend to these customers. The platform would ensure that the lenders are respectable and not trying to pull a fast one or cheat their customers.
Traditional financial companies can profit from being the facilitator by taking a commission or fee as part of the overall transaction.
The platform creator will own the data from the exchange of value between a customer and a third-party lender. Fintech lenders, individuals or non-banking third-party lenders will sign up because it’s much cheaper to pay the platform a commission on the principal of the loan than the customer acquisition fees they pay to acquire new customers from digital channels, at scale.
Customers will love it because their financial service providers are helping them solve their credit needs, even if that company can’t solve those needs by lending directly.
Why hasn’t this been done already?
- It has. In areas of the world that have less entrenched financial institutions, there are a number of companies actively pursuing similar opportunities. The most notable example is Alibaba’s Ant Financial. However, traditional financial institutions already have the customer relationships and the know-how to own this opportunity, if they move quickly enough.
- Financial institutions’ most common excuse is regulation. This excuse is a blanket excuse to not take business model innovation seriously in regulated industries, especially finance.
- Incumbents don’t want to compete against themselves. The idea of helping customers get loans from a third-party lender is contrary to how many of these companies approach competition. But, this is the 21st century, times have changed and so have business models. It’s time to think and operate like a platform business.