“FinTech” has become this year’s ever-present buzzword. With the rise of alternative financers, the banking industry is being challenged with innovation and idealistic start-up mentality.
As marketplace lenders woo and entice consumers with their 21st century business model, it is making banking institutions question the legacy of their own. Many analysts and experts believe that the new generation of players will not only challenge institutional banks, but quickly replace them.
This begs two questions:
- Should traditional banks try to replicate the business models of alternative lenders?
- And if yes, can they effectively replicate the model to compete side-by-side the best of FinTech?
The short answer: Yes and No.
No: Institutions Provide Mature Infrastructure
Institutional banks have been around for decades, with an extensive foundation of mature infrastructures that meet even the most stringent compliance and regulatory challenges, earning essential consumer trust.
While millennials may gravitate toward the new and exciting features of FinTech, potentially disrupting some of the financial sector, it is unlikely that banks will fade away. This is because most FinTech lenders only provide a single layer of an entire full-service banking system.
Plus, while FinTech lenders with shadow banking counterparts currently do not face the same regulatory burdens as banks, regulatory scrutiny on the sector is foreshadowing the changes to come; and it will only become more challenging for alternative lenders to compete.
Yes: The Cultural Advantage of FinTech
Marketplace lenders are the definition of start-up culture. For them, big risks can result in even bigger rewards. With low operating costs, minimal regulations and Big Data at their fingertips, alternative lenders have created an agile solution that enjoys the advantages of the financial institution without its costs.
Unfortunately for traditional banks, this style of business is not scalable to the level that most of them exist; and as already mentioned, is not the best fit for institutional banks. To stay competitive with lending, traditional banks must discern how to embrace the start-up culture without compromising their reputation and institutional rating.
Incorporating parts of the start-up mentality will allow institutional banks to better position themselves to attract and empower the best and the brightest in the industry.