March 2017

Why Commercial Lenders Must Embrace Fintech Now

It is safe to say that over the past 10 years technology has completely transformed everything from the way we read to the way we shop. The lending business is not immune to technology’s disruption. G. Scott Paterson explains how embracing the fintech revolution will put lenders in a stronger position with their customers.

G. Scott Paterson, Chairman & Chief Executive Officer, FutureVault

G. Scott Paterson, Chairman & Chief Executive Officer, FutureVault

Technology is quickly changing the face of finance. It might be more obvious on the retail side, where mobile banking and robo advisors are all the rage, but it’s happening everywhere — including in the asset-based and commercial lending space. Lenders need to ask themselves: Am I interacting with my customers using technology like cloud-based document sharing and digital signatures? Am I investing in blockchain to improve everything from record keeping to processing loans? The coming disruption is exciting, but also scary.

When the internet emerged into ubiquity beginning two decades ago, consumer businesses were disrupted first; business-to-business disruption came later. We see that consumer threat to the finance industry today from startups like Square or Stripe, which manage payments, and Kabbage and Funding Circle, which offer online peer-to-peer loans for business. Increasingly, change is coming to Wall Street’s institutional businesses as well. For example, blockchain, the technology platform that enabled the digital cryptocurrency Bitcoin, shows promise for everything from settling stock trades to facilitating syndicated bank loans and speeding the processing of commercial loans.

Smart commercial lending executives should embrace new technologies and invest in finding ways to use them to strengthen their business before disruptors move in. Here are five reasons to partner with fintech companies today:

Commercial Banks are not in the Technology Business

Fintech is not always the enemy. In fact, it can be quite the opposite if approached strategically. In order for these technologies to take hold, new companies need to partner with established firms. Financial services firms are entrusted with the care and management of money, and that’s a very high barrier to entry, one that most fintech companies have yet to overcome. At the same time, commercial banks are not in the business of innovating and creating new technology solutions to improve record keeping or security. When commercial banks and fintech companies work together, however, they can disrupt the industry for their mutual benefit.

Smart companies should establish technology committees responsible for tracking technological developments in their space so they do not get blindsided by advances or fall behind competitors that are adopting the latest technology. A recent report by Accenture said financial service firms should add a board member that has expertise in technology, noting that banks in particular face an acute challenge adapting to the digital world. The report noted that more than two-fifths of banks have no board member with any professional technological experience.

Time is Running Out

The time for chin scratching and stalling is behind us. Once disruption hits a tipping point, just under 50% of the revenue of incumbent businesses is lost within five years to disruptors or competitors who have embraced change, according to the PwC Global Fintech Report (which makes for sobering reading). The insurance industry is an example. Half of the revenue from the agent-based distribution model has shifted to direct insurance sellers in recent years. According to the report, incumbent businesses fear they might lose 23% of their market share due to technology while fintech companies hope to gain 33% of the business of incumbents. Executives in the fund transfer and payments industry fear they might lose up to 28% of their market share, and bankers forecast they are likely to lose 24% of their market share. Against that backdrop, the time to act is now.

Fintech Can Level the Playing Field

Financial technology can level the playing field for smaller banks and credit unions, allowing those who embrace technology to grow and even enter new markets such as commercial lending. While small banks lack big budgets to experiment with fintech in-house, they can use innovative digital offerings to expand beyond their traditional customer base. Smaller banks typically have higher satisfaction rates and greater community involvement, putting them at an advantage in gaining middle market customers.

Meanwhile, fintech companies are socially savvy marketers who have learned how to quickly establish themselves on a national scale with limited advertising budgets. But the current regulatory environment makes it hard for them to directly enter the financial services industry. Small banks can combine their strengths of keeping customers happy and dealing with regulators with fintech’s ability to develop cutting edge, consumer-centric digital offerings.

Technology Enables Banks to Give Customers What They Want

Customers want new, easier ways to interact with their financial services companies and to manage their finances. That is true of business customers and retail consumers. That can be anything from creating a better online experience for business customers to adding secure document filing within a digital safety deposit box. Adding those capabilities can help acquire and retain clients to grow a commercial banking business.

That’s not news for most financial firms but, unfortunately, a survey by Gallup reveals that many institutions are getting the transition to digital wrong by not providing a strong enough digital experience to keep customers satisfied and engaged. Financial companies need to be at once more strategic and more aggressive about their digital plays to provide superior service.

Partnerships Allow Financial Service Firms to Stay Competitive

Disruptive companies often leave established businesses in their dust. Think of how Google shook up the advertising business, how Apple forever changed the mobile phone industry and the distribution of music and content and how Facebook completely altered media and communication.

Asset-based lenders are not immune to such upheaval. Smart financial service firms will partner with best-in-class fintech companies, helping them meet (and even surpass) the expectations of their tech-savvy business customers.

We are at a technology tipping point where financial service companies are either going to build market share or struggle for years. However, even the most enthusiastic financial firm can’t expect to change into a digital company overnight. According to research from Deloitte, firms must, over time, develop a workplace that is agile, allowing for constant innovation in a culture that is willing to “fail early, fail fast (and) learn faster.” Savvy financial service firms need to transform their culture from within while at the same time partnering with fintech innovators that can develop enhanced digital experiences now in order to keep their business for the long run.