I was at an event recently where alternative finance companies introduced their services. There were many new finance solutions for lending, real estate, investing and short-term finance. These companies explained how they have built their own platforms, have handled some finance (millions or dozens of millions), and are now looking for more investors. After witnessing all this activity, it seems the bottleneck of finance is not really the number of services and platforms available, but somehow getting the whole ecosystem to work.
Traditionally banks and other lenders have been able to use capital from deposits for loans, and use securitization to get additional capital for loans. Lending has been part of a huge finance system. It guaranteed money for lending and investing, but also created many complex finance instruments that have also combined more and less risky products – sometimes very risky, as seen in 2008.
Now we’re seeing new FinTech-based finance services whose technically excellent premise could be integrated to the whole finance ecosystem. But the technology as such is not enough to get the ecosystem to work. Many of these services have focused on building their own platforms and collecting their own investor user bases. Maybe they haven’t totally figured out yet in which business they really want to operate.
Some leading p2p lending platforms, like Lending Club, have institutional partners to lend and invest in their platforms. It is a starting point to use these platforms as a distribution channel for traditional finance services, such as banks. I earlier wrote that the invisible impact of FinTech is probably greater than the impact on visible services. This means that there are a lot of opportunities to really integrate these new solutions to the ecosystem, but also many challenges.
New digital finance services can help create much better finance products than the old models. The services can collect much more data, analyze and monitor the data in many ways, and monitor real-time information. This enables much better financial decision-making, better syndication, better pricing and better secondary markets. But to achieve this situation, the services much talk to each other, understand each other’s data, and there must be a market for them.
We are still in a situation where people and companies must fill out a lot of old-fashioned forms on paper to apply for a loan in a bank – even when much more data would be available in digital formats to make this simpler. Online finance services collect more data automatically from other systems, like using digital KYC and importing data from other finance tools, but they still do securitization in quite traditional ways, or hold roadshows to find investors. These simple examples show that many new services are still sub-optimized and don’t even have smooth digital processes, much less an ecosystem.
I have sometimes compared FinTech-based ecosystems to mobile and digital advertising ecosystems. It is not enough just to show some ads on screens. Digital advertising needs a lot of data from publications and users, targeting tools, systems to sell inventory, planning tools for advertisers, and many other components. This ecosystem includes thousands of companies and systems that must be able to talk to one other. A similar scenario could play out for the alternative finance ecosystem, but it’s still early days, and the critical mass needed to get the market to really work is missing.
We have, at least, three issues getting in the way of that critical mass:
- Many alternative finance platform services still believe they are only a platform business and just focus on their own full-stack technology and user base, when they should realize they are a part of the big finance machine, and focus on building their positions in this ecosystem
- Traditional finance institutions are still slow or reluctant to utilize the opportunities of FinTech in the customer interface, back office and processes to cooperate with other companies – e.g. loan processes are still very old-fashioned and don’t utilize data and digital technology properly in the whole process
- New models for securitization, trading and secondary markets are still missing, or are isolated individual solutions – these solutions are a backbone to get all parties to better work together, utilizing the same data and creating new products.
The real value and winners of FinTech rises from models and solutions that get the finance ecosystems to function better as a whole. FinTech with digital services, more data and automated processes will disrupt the finance sector. Those who want to lead this disruption must now focus to build digital veins, not isolated cells. It also requires that both new and old finance companies must really understand their own positions and core components in the ecosystem. If we think of the massive size of the existing finance ecosystem machinery, it is naive to listen to stories about new services that would conquer the whole finance world all by themselves. The winners of this disruption will be the collaborators, not lonely riders.