FinTech: Empire Strikes Back?

Source: Lucas Films / Disney

Following last week’s blog, someone sent me a question: “Interesting read, thanks for sharing. I think an interesting question to follow this up is how are existing incumbents responding to this. They have access to a ton of proprietary information that may be more relevant than what is available to “disruptors” and can be found on a LI or FB profiles.”

Here is my answer: I agree. As a former banker, I must say that banks are quite slow to adapt to competitive threats. Although there are the exceptions like JP Morgan’s CEO, Jamie Dimon, who has been touting the “Silicon Valley” threat for awhile.

Currently, “forward looking” banks have responded by partnering and investing in some of the aforementioned disruptors. But, the slower and smaller regional banks will probably continue to hemorrhage market share in the future. For whatever reason, banks just seem slow to turn their customer information into meaningful sales and marketing insights. My hypothesis is that it’s because many banks still use archaic data information systems that date back to the Microsoft DOS days (not joking). Which means that their customer data is either unclean or irretrievable.

The caveat: Although online marketplaces are a far more efficient mechanism for capital allocation, it does appear that these platforms are still transitioning towards more robust credit analysis. For example, the “loan charge offs” graphs below are taken from Lending Club’s 2015 10K:

Source: Lending Club 2015 10K
Source: Lending Club 2015 10K

Now, look all US-based commercial banks for both consumer and business “loan charge offs” graphs:

Source: Federal Reserve Bank of St. Louis
Source: Federal Reserve Bank of St. Louis

Even at the height of the financial crisis, net charge offs only topped out at approximately 2.5% and 6.75% for business and consumer loans, respectively. It appears that the banks still have a competitive advantage when it comes to credit analysis, but disruptors like Lending Club are improving every year.

Keep in mind that this is not exactly an “apples to apples” comparison, but it does articulate my point.

In Summation: The FinTech disruptor(s) who can offer an excellent customer experience coupled with superior credit analysis will develop a monopoly within their area of operations, i.e. home mortgage, student loans, business loans, etc., thus making their shareholders quite happy.

About the Author: Christopher Brookins is a Pittsburgh-born, Carnegie Mellon trained Entrepreneur and Investor looking to change the world for the positive.