Can Fintechs Survive an Economic Downturn? Maybe if They’re Not Alone.

2 min read

Banks severely reduced lending during the 2008 financial crisis, but that didn’t mean people weren’t still looking for loans. Supply. Demand. You know how it works. The banks created a big space when they stopped lending, and this space was filled by fintechs.

A Different Sort of Lender

Nearly everything about these fintechs was different from banks. Banks struggled to embrace new technology while still working with legacy systems, but the fintechs were all about new technology. Big data and machine learning were part of their DNA. Banks in 2008 were largely product-focused. The newly-created fintechs were customer-centric. Fintechs were and continue to be on the cutting edge of technology, and they use this technology to cater to their clients.

Since 2008, the fintech market has exploded. The current global investment in fintechs is $25 billion. Despite this enormous growth, there are some who don’t think fintechs are going to survive. Although born out of a financial crisis, these companies have largely matured during a time of economic growth and low default rates. Can fintechs survive a tougher financial environment? The proprietary lending models of these businesses have not been truly tested. As economists warn of a recession on the horizon, that test may be coming soon.

Each entity has its own model for making lending decisions, but one thing nearly all fintechs have in common is that they put little weight (or in some cases no weight at all) on traditional credit scores (FICO, Equifax, etc.). An individual’s FICO score is what traditional banks use to make their determination of whether to loan money. Fintechs don’t think this number is an accurate reflection of how risky it is to loan to an individual. This is lucky for borrowers, since nearly half of the U.S. population has a credit score below 650, the cutoff below which it becomes more difficult to get a traditional bank loan.

So what data are fintechs using to determine lending strategies? A lot. Prosper Marketplace, for example, uses 500 pieces of data to assess each potential borrower. The individual’s FICO score is just one of these 500. SoFi has actually declared itself a “FICO-free zone.” They use mainly employment history, an individual’s track record of meeting financial obligations, and monthly cash flow to make lending decisions.

Wait, Who Is Working Together?

Who will prosper in the end? Which model will prevail? Big banks or fintechs? It turns out these are not the right questions. Instead, we should ask how fintechs and banks can benefit from each other’s strengths. That is the question banks and fintechs have been asking themselves, and it has led to several partnerships between entities that might otherwise seem at odds.

When you think about it logically (which, let’s be honest, often isn’t the way competing organizations think), this solution makes perfect sense. Banks can benefit from the technological insights, customer-centric focus, and agility of startups. Fintechs have a lot to gain from the scale, reach, stability, and regulatory management know-how of banks.

The idea of partnership has definitely caught on. 75.5% of respondents surveyed as part of Capgemini’s World Fintech Report 2018 said that collaborating with traditional firms was their primary business objective. Both banks and startups stand to gain from such partnerships. The group that potentially has the most to gain from the partnership, however, is the consumer. The best of parts of what fintechs and traditional banks have to offer all in one place? Yes, please.

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