Insurtech, Fintech Disruption, and Industry Consolidation: Our LendIt USA Highlights
Last week, the DemystData team was excited to exhibit and speak at LendIt USA — one of the largest fintech gatherings of the year. The conference, which in its first edition in June 2013 brought together 340 people, has grown to include two days of networking and discussions amongst 5,000 attendees, 350 thought leaders and more than 2,400 companies. With so many different topics and trends, here are some of our most important takeaways from this year’s event:
Insurtech is gaining prominence: LendIt USA ventured into the world of insurtech for the first time, marking the growing importance attributed to tech in the insurance space and the need for the industry to catch up with other fintech segments, including banking, payment, and lending. The end of 2016 also saw global investment in insurtech companies reaching a new milestone, with $1 billion funded in a single year. The sector is doubling its efforts to innovate and introduce new technologies to replace antiquated IT systems. It remains to be seen if insurtech will avoid following fintech’s footsteps and steer clear of over capitalization without fully delivering on its promise.
Banks versus fintech disruptors, the fight goes on: Unlike their peers in insurance, banks have caught onto fintech trends and are using their substantial influence to muscle out the competition. The big question on everyone’s mind is: can they innovate faster than the more agile online disruptors?
On the one hand, banks enjoy considerable budgets, decades of tech implementation experience, as well as lower costs of capital than their fintech cousins, enabling them to bring innovative lending technology to scale. On the other, they need to fight against their ingrained risk averse impulses and bureaucratic tendencies that typically inhibit the prompt adoption of new techniques.
Online lenders, as they have shown in the past five years, have a much higher risk tolerance and a bigger appetite for trying new things, even if unsuccessful. This translates into a greater propensity to leverage new technologies to automate processes, make better lending decisions, and improve the overall customer experience. Their high cost of capital can, however, be prohibitive, and their considerably lower market penetration, combined with their constrained resources for third-party technology implementation, may limit their reach.
A lower cost of capital and greater inherent customer acquisition capabilities have been critical factors enabling the bigger players to recapture some of the buzz in the fintech space. But online lenders haven’t had their last word. Should they decide to focus all of their energy into making better lending decisions and leveling the cost of capital, they could come out victorious. Needless to say, this struggle is bound to be a long, arduous one.
Consolidation is near: The much smaller number of Chinese lenders present at this year’s event stands in sharp contrast to the proliferation of US specialty lenders (everything from medical to funeral to wedding finance). If the state of China’s fintech serves as any indication for the future of the US industry, we can soon expect consolidation to weed out the smaller shops. In the meantime, banks will need to increase their use of third-party providers to keep up with the current pace of innovation and encourage organic revenue growth, thereby accelerating the consolidation process.
Lenders are at fault if they still suffer losses based on missing simple information: During a panel discussion on underwriting when little credit data exists, DemystData CEO Mark Hookey drew attention to the issue that “knowable, predictable facts”, including whether a consumer prospect has a job or willingness to pay, are being priced at a higher rate despite being easily verifiable. The technology is out there to get this information in a usable format, and it’s up to lenders to make sure they leverage the right platforms to improve their lending results, whether they are fintech players or banks.
Where do we go from here: As Andrea Jung from Grameen America so aptly put it during her talk, “Access to capital is important but access to technology paired with access to capital is key to driving growth”. The ideal path forward may simply be that of greater partnerships between established institutions and disruptors. This should help ensure that, at the end of the day, the customer is the real winner.