SPOTTING SIGNS OF TROUBLE ON THE HORIZON
Since its beginnings in 2005, marketplace lending has emerged in niches, and this modus operandi is likely to continue. One or several new entrants will erode the market share of banks piece by piece, or they will slowly build up a new niche market entirely.
However, the issue for banks is hardly individual lending platforms that service a few niches. More troubling is the fact that customers might be able to re-combine several FinTech services into their personal modular bank. Another issue is that niche lenders might slowly amass a war chest of cash and expertise that allows them to encroach farther and farther on the turf of established credit institutions. We discussed both scenarios in the first part of this book.Looking for signs of disruption in the dynamic between marketplace lenders and banks misses the larger picture. It may be too easy to decide that FinTech startups are still too small to matter. It is also a simplification to pronounce that marketplace lending will turn the entire credit sector on its head. The larger implication for the banking sector loom on the horizon, and the biggest one of them has its origins directly in banks: banks have become unable to cultivate customer-centric innovation on their own.
From the perspective of entrepreneurs in marketplace lending, the premise for digital strategy is relatively straightforward: they are the new disruptors with nimble business operations who launch experiment after experiment until something sticks. Those lending platforms that have been around for a while may already have high valuations and high profile partnerships. At the same time, their market share of the overall lending market is still modest, and their products far simpler than what banks have on offer. To grow, they need to find ways to attract those lenders and borrowers who still transact with banks.
They become a threat when they can fund loans for larger ticket items—such as real estate or credit lines for small and medium business operations—at the same or lower rates than established banks. However, to do this, the new competitors would have to play by the same rules as the banks they are trying to disrupt. They would have to come out of the shadows, comply with the same financial regulations as banks, and start requiring collateral for their loans. Additionally, marketplace lenders would have to offer the same kinds of liquidity for their investments as banks. They should also think beyond competing in a fragmented market. Most marketplace lending platforms claim they have no ambitions of replacing banks but only wish to service a slice of the market more efficiently. Nevertheless, when several marketplace lending platforms compete for the same niche, they will drive down margins with ever greater concentration of credit exposure.If one thing is for certain, then it is that time is accelerating in the digital world, not slowing down, and the strategy of marketplace lenders should already concern itself with the way that they will operate on the declining end of their business cycle. How exactly lending platforms could evolve their business model will be the subject of Chapter 16 (The Hybrid Financial Sector). Banks have a little bit more to worry about in the short and medium term. For this reason, the rest of the chapter will examine how banks could formulate strategies to cope with disruptions in the credit sector.
Banks are still the undisputed market leaders in the credit sector, so they might dismiss the recent forays of marketplace lenders onto the scene. In the analysis in Chapter 13, we found that the marketplace lending model is promising but still incomplete for lack of analytics, among other issues. However, as we have seen in recent history, complacency is a poor strategy to deal with new entrants. When startups in the sector fetch multi-billion dollar valuations, something is afoot, and banks should brace themselves.
At the same time the business cycle of lending institutions is already in the very late stages: their market share is almost 100 percent with even late adopters and laggards as their customers, their business models are at a plateau, and in some cases they even retrench. How banks can upgrade their business models towards one that incorporates FinTech innovations of recent years is unclear. So, how should they behave at this point?In Part One of this book, we discussed the fact that the business structure of a bank is hardly compatible with that of a tech startup. The initiatives of banks to fund FinTech innovation and collaborate with startups are a promising beginning, but these moves will hardly transform banks into innovators themselves. At the end of the day, they will have to find sensible ways to foster a more entrepreneurial culture in their operations. This will be a longer-term process, which will require radical shifts in their business model.
15.4
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