Fintech versus Traditional Lenders:  Pros, Cons and Collaborations

Fintech versus Traditional Lenders:  Pros, Cons and Collaborations

Articles

Published
February 26,2019

Traditional Lending or banking has existed for centuries. Conceptually Banking has been the same since 1660s; whether double ledger accounting which led to lending or deposit acceptance across designated branches during the Renaissance period of Rothschild. 

In the last couple of decades; ushered by the advent of Internet during the dot-com era and mobility since I-phone advent, technology is playing a disruptive force the way banking is done by traditional banks or lending is done by new-age Financial Technology companies known as Fintech Companies.

NBFCS THE FIRST DISRUPTORS OF TRADTIONAL LENDING INDUSTRY: However Finetch companies are not the first disruptors of the banks traditional ways of lending. About a decade back, Non Bank Finance Companies (NBFCs) took root in India and they were much nimbler than traditional banks.  NBFCs such as Bajaj Finserv, Tat Capital, Indiabulls or Capital First upended the model of lending by putting in place teams of motivated and efficient employees and created a menu-driven process for consumer lending, which cut down the lag between an application and a credit decision from weeks to days or even hours. This spawned a revolution of consumer lending in terms of Consumer Loans,  Personal Loans, Business Loans and Machinery Loans. However, still in this case, the lending process remained human intensive, an army of Sales Personnel and Credit Officers honed a manual process of Balance Sheet lending strategy right from entry barriers like credit bureau scores to Sanctions barriers like bane of leveraged lending story of monthly instalment squeezing the actual requirement of an unsecured borrower.

FINTECH LENDING: A NEW FORCE:  Today digital technology has unleashed yet another disruption in the Lending market which threatens to again shake the traditional way of lending paradigms established by older baking systems and newer NBFCs systems. These are Financial Technology Companies and they are again leveraging innovation and technology to transform the consumer borrowing experience. These companies are focused on bringing new borrowers into the ecosystem by providing them with convenient and intuitive web and app-based interfaces. These companies have brought new customers commonly known as NEW-TO-CREDIT (NTC).  Some of these Fintechs like DMI Finance, Capital Float and LendingKart have partnered with select group of banks like RBL Bank who are embracing tech-first or tech-only approach to underwriting and are providing balance sheet support to these finetch companies.

A competitive chart below outlines the strengths of Fintech Companies and Banks

SCORING AREAS OF FINTECH COMPANIES

SCORING AREAS OF BANKS

Faster Processing Time

Lower Operational Cost

Improved Convenience

Large Geographical Spread

Undeserved Target Segment

Stronger Risk Framework

Lower Risk Aversion

Stringent Collection Mechanism

Enhanced Data Harvesting

Diverse Product Offerings

Innovative product Offerings

Bigger Financial Muscle

As Outlined above, Fintechs and Banks/NBFCs have their own set of strengths and they are hence creating a different market niche known as Co-Lending. As explained above, some finetch companies like Lendingkart, DMI Finance, FlexiLoans are getting balance sheet support from new age banks like RBL Bank, Bandhan Bank and IDFC Bank where the banks book the loans on their balance sheet while all other aspects of customer asset quality is handled by these companies. A detailed analysis on how new Fintech Companies can collaborate to have a greater impact is given below:

Where Fintechs can score

Where Banks can score

Improved Sourcing: Fintech firms would benefits

from bank’s widespread presence when it comes to

source cases due their lower cost of operations

Improved Sourcing: Banks stand to gain from a

fintech’s targeted digital sourcing mechanism both

from direct sources as well through affiliates and

partners

Enhanced Serviceability:  Fintech works actively

with bank for co-lending thereby increasing the

requirement of funds

Enhanced Serviceability: Banks get new set of

customers with diverse needs higher than just small

ticket loans  which banks can harvest

Structured De-Risking: Fintech stand to gain a lot

understanding of bank’s trusted age old systems of

Risk Mitigation and Fraud Control

Structured De-Risking: Banks large captive database

of active customers can be actively harvested together

by banks and Fintech firms for loans which otherwise

wouldn’t be possible on bank’s books. Banks can make

use of Fintech’s complex data modelling methods and

algorithms developed for quicker turnaround time.

Higher Growth: Fintechs are start-ups on high growth

trajectory and would require access to growing

customer database to sustain their growth

Higher Growth: Banks stand to gain through referral

or income sharing model agreement with fintech firms

while harvesting their large captive database of their

branches which otherwise are left unattended

Improved Decisioning: Fincteh firms use a

combination of traditional and non-traditional data

points to process a case faster and more accurately

thus enhancing the bank’s credit scoring models

Improved Decisioning: Banks which tie up with

fintechs can marry age old banking models of lending

and symbiotically marrying it with new age decisioning

models

 

What remains to be seen is the timeframe when banks adopt lending practises of Fintech Companies and Vice versa. Also for any meaningful collaboration to take place it has to stand the test of time to gauge the scope and outcome of the same.

 

 

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