For hundreds of years, credit has been a bricks-and-mortar business.
When people needed a loan, they would naturally go to a bank. The last few decades have challenged the traditional banking business model: new ways to lend and borrow capital with electronic distribution have developed rapidly, and they are here to stay.
The two approaches to lending co-exist for certain types of loans, but banks still deal with the big-ticket items, such as mortgage loans. Giles Andrews, CEO of the first marketplace lending platform, ZOPA, points out that his company has no intention of replacing banks. Instead, it is focusing on doing a slice of banking more efficiently.1 The requirement for a banking license prevents online lending platforms from offering credit cards and current accounts. Yet, in underwriting for small business loans and personal loans, marketplace lenders might gain significant market share.The threat of disintermediation puts the established market leaders in the financial sector on the defensive. Most banks are firmly rooted in the 20th century. Even though they offer online banking and mobile banking, they will need to continually embrace electronic platforms and digital technology and upgrade their operations to meet the needs and demands of customers. Unfortunately, the debate about the future of finance is often one-sided. It often pits the crusty banks that have trouble catching up with innovation against the nimble FinTech startups that seem to have all the answers. This picture is inaccurate. Banks need to roll up their sleeves to help reinvent the financial system; but so do online lending platforms—to streamline their processes and analytics to make them more transparent and robust.
To usher in the next generation of lending, banks and online lending platforms need to become aware of the dilemmas they face. At the same time, most recommendations for the lending institution of the future assume that the model of branchless FinTech startups is the ideal model for banks to strive for. As we saw in Part Two of this book, marketplace lending platforms have a lot to learn from banks when it comes to risk and profitability management and analytics that make their loans comparable and transparent. When it comes to maturity and experience with credit cycles, they have nowhere near the expertise that banks have collected over many years in business, and that include plenty of stressful situations.
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