P2.3 BANKS ARE FAR FROM DEAD
With the surge in peer-to-peer lending and the massive funding rounds by FinTech startups hogging the limelight in the media, it is easy to label the forays of startups into the financial sector the swan song of established bank lending.
However, regardless of customers' new view of banking and attitudes towards money, the formal financial sector and traditional lending is a success, contributing close to 8 percent to the GDP of the United States in 2012.5 To dismiss the knowledge of banks in designing new financial services in FinTech startups would be a foolish move. Despite criticism of established financial institutions, banks have established best practices in lending and operations that have worked well for many decades. Unless FinTech entrepreneurs understand how formal bank lending works, they will hardly be able to meaningfully innovate the credit sector. In fact, some online lenders are already on the path to making the same mistakes as the banks did in the run-up to the financial crisis of 2007/8: several platforms are selling their sub-prime loan portfolios in bulk to banks and hedge funds who securitize them for big insurers and asset managers.6 Financial technology innovation should follow a better paradigm than “same, but different.” Instead, it should help evolve the financial sector toward better ease of doing business, more inclusivity, and more stability. To achieve this, entrepreneurs with an interest in online lending get a head start if they stand on the shoulders of giants instead of trying to reinvent the wheel.
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