For online business lenders, 2016 was a rough year.
Two prominent fintech companies saw their market valuations drop. One small-business lender abruptly stopped issuing loans temporarily due to performance issues, while another was forced to shut down. The industry as a whole faced heightened skepticism about its growth prospects. Taken altogether, it was a sudden about-face from the “wild west phase,” when fintech companies seemed poised to dominate the lending market.
Karen Mills, former administrator of the Small Business Administration, and Brayden McCarthy, Vice President of Strategy for Fundera, analyzed the downturn in a working paper for Harvard Business School. “It appears that this initial phase of new market activity is coming to an end with problems surfacing for leading players such as Lending Club, Prosper, and OnDeck,” the paper summarized.
I have a different view.
Fintech loan originations will continue to surge
While some lenders stumbled in 2016, I see borrower demand continuing to be strong. Here’s one prediction: Expect a record year in originations.
Some naysayers project slower growth for online lending. But I believe this was based on an overreaction to last year’s events.
It’s clear to me that the fintech space’s long-term themes are unchanged. The credit gap remains, and fintech companies still provide a much-needed service. Plus, they’re doing so in a far easier and seamless way than has been available to customers in the past.
Those who reacted to the negativity of 2016 are going to be surprised. Fintech companies will recover from the sector’s downbeat view. Demand and originations will continue to grow. I predict that market sentiment — which is fickle — will come back as confidence returns.
Fintech companies will adapt by diversifying products and target markets.
There will be changes, including one that we’re already seeing.
Many fintech companies began by focusing on a single need. That might be consumer loans, mortgages, small-business loans or student loans. We now see more fintech companies expanding beyond their initial scope to address multiple needs, and that trend will continue. Simply put, there will be fewer pure plays.
Today’s fintech businesses either offer more services to their existing bases or expand to other segments and markets. This certainly is true at Bluevine. In 2016, we went beyond our core product (invoice factoring) and began offering a flexible business line of credit.
This is one lesson fintech companies have learned from traditional banks. Both are thinking in terms of customers, not just products. They’re asking: How do we provide more services to the same customers or to new customer segments?
Modern mainstream lenders don’t think of individual products. Instead, their people look to assemble an entire portfolio of services they’ll offer each customer for an entire lifetime. Today’s banks don’t pitch just a checking or savings account — they offer a 401(k) account and a college fund, too. They ask themselves, “How do we solve as many of your financial needs as possible?” Fintech companies will follow a similar trend, resulting in fewer one-trick ponies.
Fintech also will get a boost from a secular trend. More millennials are joining the workforce and consuming more services online, including financial services. The generational change favors fintech companies.
Fintech companies could form partnerships with banks.
The fundamental factors that drive demand for services remain strong and are getting even stronger. For example, traditional banks face enormous challenges when it comes to deploying capital to small businesses.
There have been some improvements, but the typical bank structure means institutions cannot be as efficient in financing business owners as most of the emerging alternative lenders. In fact, some banks have formed partnerships with alternative lenders. This points to a recognition that fintech companies are providing solutions that are better in many cases than what traditional banks can offer.
Now, to be clear, it’s not that banks don’t employ smart people. It’s just that banks are hampered by legacy systems, regulatory requirements and cumbersome processes that prevent them from providing faster, more efficient and innovative services.
Fintech will dominate the user experience.
Even with all this upside, fintech companies will continue to trail in one important area: Banks will continue to have an advantage on cost. Their scale and access to capital make it hard for fintech companies to compete unless they, too, start taking deposits. And once that happens, a fintech businesses become banks themselves.
My confidence in fintech’s future is based on another factor. We’re making a dramatic difference in user experience. Amid the skepticism about the industry’s direction, fintech companies continue to revolutionize the way people manage their finances — dramatically improving lives in the process.
If that weren’t true, our industry wouldn’t exist.
This article was first published in Entrepreneur on March 22, 2017.