FORCES OF COMPETITION IN THE DIGITAL AGE
Several forces are at work when companies compete in the digital age.1 They can help frame the discussion about the rivalry between marketplace lenders and banks. Among these forces are:
1.
New pressure on prices and margins2. Competitors emerging from unexpected places
3. Winner-takes-all dynamics
4. Plug-and-play business models
5. Growing talent mismatches
6. Converging global supply and demands
7. Relentlessly evolving business models—at higher velocity
Let's look at the forces in this list for a minute. Most of them are in effect in combination when marketplace lending platforms and banks compete.
16.1.1 New pressure on prices and margins
For instance, several trends exert pressure on prices and margins in the credit sector: technology brings down search costs, transactions costs, and labor costs, and it makes incomplete information more complete. When products and services go digital, they often become commodities. Customers can easily compare them, and when their features closely resemble each other, they will often choose those products or services that are the least expensive.
16.1.2 Competitors emerging from unexpected places
Competitors in the digital age often come from unexpected places because technology has lowered the barrier to entry. It is no surprise that many entrepreneurs in the FinTech space have good ideas but little background in finance. New entrants without a track record have a big advantage: they can drive a puppy dog strategy. Because of their unthreatening demeanor, incumbents tend to leave them alone until they have grown so strong that they are here to stay.2 Of course, the puppy dog strategy makes sense for any kind of startup. However, in technology- enabled sectors, those competitors who come out of leftfield are even more dangerous because they can achieve critical mass at short notice when network effects and zero marginal cost play in their favor.
16.1.3 Winner-takes-all dynamics
The existence of winner-takes-all dynamics in marketplace lending is up for debate. A number of platforms are peacefully coexisting with established lending institutions, and there seems to be room for more than one marketplace lending platform. At the same time, new companies can concentrate on single niches in the absence of legacy products and an established identity. Additionally, when a niche turns out to be unprofitable, they can quickly rebrand and concentrate on another demographic until they become the winner in one particular niche. Even though marketplace lending may hardly usurp the entire credit market any time soon, banks should be aware of the danger that they may lose customers in specific niche markets rapidly and unexpectedly. At the same time, FinTech startups need to take scalability into account from the very beginning. They should prepare themselves for surges in transaction volume before they cross a tipping point.
16.1.4 Plug-and-play business models
Plug-and-play business models emerge when technology disintegrates traditional value chains. For some companies, it may not be economical to build certain parts of their value chain from scratch, so they simply integrate them into their operations. Banks and insurance companies sponsor FinTech accelerators for a reason: this keeps potential competitors close and lets them absorb innovation into their operations as it happens. At the same time, FinTech companies can benefit from the experience of banks and other financial institutions. Do they really need to rebuild the capacity for analytics and data handling from scratch, when banks have decades of experience in these fields?
16.1.5 Growingtalentmismatches
As software replaces physical personnel, the workforce inevitably shrinks. Hirt and Willmott estimate that of the about 700 end-to-end processes in banks, algorithms could automate about half of them. But while banks cut positions, they also add new employees in their digital operations.
The challenge is finding the right employees to keep in areas that are still hard to automate away.16.1.6 Converging global supply and demands
Digital services easily transcend markets. While most marketplace lending platforms still focus on a single home market—most of them in the United States, the UK, and China— international collaborations are already emerging. For example, e-commerce platform Alibaba and the marketplace lending platform Lending Club have announced a planned partnership that will allow the marketplace lender to provide business loans for American customers of the Chinese ecommerce giant.3 While this deal still centers on the United States, the leap for some marketplace lending platforms from the West into China may already be on the horizon. In addition to the global reach of software platforms over the internet, FinTech also profits from the fact that capital has no nationality. Digitally enabled financial services therefore leverage global supply and demand to the maximum.
16.1.7 Relentlessly evolving business models—at higher velocity
When business models go digital, their evolution never stops. Innovation in one sector will create upheaval in another in a shorter time than most incumbents of yesteryear have adapted to. For companies that started out with strong bricks-and-mortar operations, this transition might be difficult. On the other hand, game-changing tech companies can also become lethargic when they feel they have arrived at an unchallenged leadership position. Layers of middle management, bureaucracy, and lazy thinking are symptoms of market leaders in any domain. Companies must reinvent themselves and adapt their business models without mercy to stay competitive. If their business model is digital, this is even more the case.
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