Alternative finance is here to stay. And when it comes to the ‘problem child’ of lending – small business – banks probably aren’t that unhappy about it. In fact, today’s problem child may soon evolve into tomorrow’s golden child, with a number of banks realizing that their ability to lend paired with fintech’s positively disruptive user experience could make for a very profitable partnership indeed.
A perfect example is the JPMorgan Chase & Co’s tie-up with OnDeck announced in late 2015. The partnership will allow the bank to price risk for small businesses more effectively by using OnDeck’s proprietary technology. Businesses will continue to engage with the bank at the frontend, with OnDeck’s involvement being largely invisible at the backend.
In Australia, major bank Westpac is piloting a partnership with SME lending disruptor Prospa.
In the UK, high street bank Santander, having cut its teeth on a fintech partnership in 2014 with Funding Circle, has just announced a new partnership with Kabbage. It suggests strong confidence in the model and no doubt more large banks will follow, bringing the disruptors in from the cold.
The reality many fintech lenders have to face is that by and large, these partnerships are inevitable. While fintech startups might begin with buckets of energy, enthusiasm and clever risk pricing algorithms, feeding these models with meaningful data sets is the chicken and egg challenge. With balance sheets that don’t support hard landings, getting it wrong is an expensive business. Today banks are the gatekeepers of the financial history and data of millions of customers. Cuddling up may be necessary purely for survival purposes – on both sides.
But wait a minute…what about a world in which access to this data was made available directly to fintech startups? In Australia, that idea is currently being explored by the Productivity Commission, on the direct order of the Treasurer, Scott Morrison. The commission has a year to produce a report into the costs and benefits of boosting the availability of financial data held by both the public and private sector. Mr Morrison is in good company. In the UK, HM Treasury has set up the Open Banking Working Group to explore just that. It’s another signal that the UK really ‘gets’ fintech and is willing to push the agenda ahead aggressively, and hopefully a sign Australia really wants to live up to it’s self proclaimed mandate of becoming the leading market for fintech in Asia.Like This Post