The Rise of FinTech : Access To Capital Daan Stolwerk
10439188 Ieva Sakalauskaite University of Amsterdam Faculty of Economics & Business
1. Intro
The financial crisis of 2007/2008 was a huge economical downturn, which is hard to fight back from. To stimulate economic growth it is important that consumption and investments can reach their desired levels. Those two are strongly linked to each other and the ability to borrow plays an important role. Banks need to approve loans as this increases disposable income and thus
consumption and it stimulates investments of small and medium-sized enterprises (SMEs) that are dependent on bank loans, as they make up a large proportion of firms, if SMEs are able to undertake investments, it can increase employment and thereby disposable income, which leads to higher consumption and in the end economic growth. Again, for this macro-economic snowball effect to happen it is important that those firms can borrow money.
We have seen however that businesses have often not been able to get access to capital and their borrowing has been constrained for multiple reasons.
The first reason is that banks needed to recover and rebuild as a result of the financial crisis in which a lot of them were heavily hit. The financial crisis that gradually appeared in 2007 caused by the bubble in the American housing market, has caused in part a sovereign debt crisis led by Greece and with the globalization of finance transferred into the European Union ( EU) in 2010. The probability that borrowers would default on their loans and mortgage payments increased
enormously because of the economic uncertainty. The banks also had their issues as well. In the US financial institutions of all sizes suffered big losses or even went bankrupt because of the subprime mortgage crisis. The sovereign debt crisis in Europe also led to big losses for financial institutions, though there were not many failures. However, depressed capital reduced bank capacity to lend or it encouraged “zombie lending’’, which is lending to inefficient firms that banks loaned to in the past, thus allowing them to hide the non-performing loans. Both the reduced capacity to lend and zombie lending are undesirable.
On top of that the banks were subdued by a massive increase of regulation and supervision, which is another reason that loan applications are more often declined nowadays. Banks are obliged to follow more rules as a result of the Basel III agreements. This agreement started in 2010 with the first phase and will end in 2019 with the last phase. Banks' regulatory capital is divided into Tier 1 and Tier 2, with Tier 1 being sub-divided into Common Equity Tier 1 and Additional Tier 1 capital. The Tier 1 capital of a bank, which is the ratio of core equity capital in relation to its risk-weighted assets (RWA), should be 6 % in stead of the old 4 %. On top of that, Common Equity Tier 1 ratio requirements increased from 4% to 4.5%. (Bank for International Settlements, 2013).
Another demand on the banks from the Basel III agreements was deleveraging to safeguard against excessive borrowings and ensure that banks have sufficient liquidity during financial stress. The leverage ratio can be estimated by dividing the Tier 1 capital of the bank by the bank’s consolidated assets and is set to a minimum at 3 %. (Bank for International Settlements, 2013). In short, the smaller leverage ratio means the banks can use less debt to finance their investments and has the consequence of reduced lending possibilities. Thus these extra requirements on banks makes accessing capital harder as less capital is available.
The traditional big banks have suffered because of the financial crisis and the increased regulation, and they also face another “threat’’.
An article in The Economist in 2014, about a letter to the shareholders of JP Morgen Chase attracted my intention. Jamie Dimon, CEO of JP Morgen Chase, one of the US’s biggest banks, claimed he was afraid of the “FinTech revolution”. With quotes including “ There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.” and "They all want to eat our lunch,” he stressed his worries. Of course I was aware of the fact that digitalization plays a big role in our lives. Yet I did not know it was having such a big disruptive power on our traditional banking model that one of the most influential people in banking was literally ‘afraid’ of a sector ‘stealing his business’. From that point on I started to immerse myself more in the industry. Gaining more knowledge, it became clear that the traditional banking model was not efficiently with all the new technologies available.
Big economic downturns very often lead to new innovations, which is actually what has happened over the last few years. A group of FinTech (Financial Technology) innovators moved in to fill the growing void, providing an element of relief and insight into the future of finance. Internet finance is the natural evolution of financial services propelled in part by the shortcomings of traditional financial services.
An article I read about Tom Adams and his “Coombeshead Farm” in the Daily Telegraph indicated that this “FinTech revolution” just might bring the required solutions. When Mr Adams approached banks asking for a loan to buy the premises for his guesthouse in Cornwall, he was met with little encouragement. The loan was needed to purchase a 200-year-old £1.5m property, in which he and his wife would combine a restaurant and a hotel. The risk that they wanted to start a business was something no bank was willing to take on, despite the fact both were proven Michelin chefs. Eventually they obtained a loan via a Peer-to-Peer platform Folk2Folk. One of the reasons the lender was willing to fund the small business project of “Coombeshead Farm” was it could provide
various economic stimuli for the local area, in which the lender was living as well. Eventually the restaurant and hotel were set up and Mister Adams and his wife are doing a great job welcoming people on a daily basis at their Coombeshead Farm. This story is just an example but it is actually not an exception. In fact, it is a good reflection of the dilemma currently restricting the financial market that for years has been served by an outdated traditional banking model that has not innovated appropriately.
The impasse is that banks are unable and/or unwilling to grant loans on the one hand, while on the other hand to give the economy a positive boost banks should approve more loan applications. As there is evidence that FinTech is growing, the aim of this research is to better understand the extent to which FinTech can serve as an alternative method to bank financing. By conducting interviews, I will answer the following research questions:
“ What impact has FinTech had on the access to capital after the financial crisis of 2008 ?”
with the additional question:
“ Are the main alternative FinTech lending platforms to bank financing, namely Crowdfunding and Peer-to-Peer lending, appropriate alternatives to bank financing, and if so which one is the most appropriate alternative ?”
By qualitative research I will present a more comprehensive insight from experts working on academic economic research into financial services and new startups in the FinTech ecosystem. The research conclusions will provide an overview with insights from the industry on the basis of the contributions of 5 leading experts from different areas I will ask questions to about the impact of FinTech on the access to capital.
The rest of the thesis is structured as follows: In section 2 I will introduce the literature review on the importance and constraints of access to capital and how it relates to economic growth. After that I will describe the solutions that FinTech might provide with the new alternative lending platforms. Then I will illustrate the impact in terms of growth. After that in section 3 I will explain my
methodology of qualitative research based on interviews. In section 4 I will present my interview findings. In section 5 I will combine all these sections together in the conclusion, discussion and my suggestions for further research. At the end in the appendix references, expert background
2. Literature review
Before the financial crisis the first step an entrepreneur would have to take if they needed a loan would be to ask for it at a traditional financial service like a bank. The financial services industry consists of the economic services offered by the entire finance sector including, banks, financial institutions, accounting corporations and consumer finance companies. (Gibson, 2015).In short people who work in financial services are in the business of effectively managing money. As I said before one of their key operations is the lending of money to consumers or businesses and giving them access to capital. The traditional banks, part of the financial services industry, have struggled with the business of effectively managing and lending out money since the crisis.
2.1 Access to capital 2.1.1 Business lending
That process however, of managing the money and lending out money is very important for economic growth. Rajan and Zingales (1996) did research on this with their paper on the relationship between financial development and economic growth. According to them we can conclude that the financial development is a significant supportive influence on the level of
economic growth. The key factor behind this is the cost of external finance to financially dependent firms. This especially holds for SMEs. Finance may simply enable those firms to pursue
opportunities, and thereby enhance long-run growth. They showed that industries like SMEs that depend heavily on external finance grow faster in countries with more developed financial markets. More specifically, this is a particularly beneficial role in the rise of new firms if they are the source of new ideas, as then financial development can enhance innovation, and thus enhance economic growth. They presented evidence that access to capital does stimulate economic growth by making it possible to pursue business plans. If these are young firms with innovative ideas it can stimulate economic growth even more.
On top of that comes the work from Jayaratne and Strahan (1996). Their paper provides evidence that deregulation of the US financial markets can directly stimulate economic growth. The reason for this is that deregulation tends to improve the access to capital, and as I said before this results in more economic growth. In addition these authors, claimed that improvements in lending quality are the key to the growth effects of economies. Banks might lend more, but even more important is that they appear to lend better. This is significant evidence that not only the quantity but also the quality of the groups that have access to capital may improve economic growth. This seems pretty logical as it is important that the lender can pay back the loan. Thus when financial markets are
deregulated it improves access to capita, which leads to economic growth as there is lending to more people and most importantly to the right people.
But after the crisis, we have not seen deregulation, but instead hugely increased regulation, which as forms a constraining factor in the access to capital. Financial constraints that limit the access to capital are one of the struggles of running business activities. A lack of resources to undertake innovative projects and increase growth opportunities are especially important for SMEs. Research by Diamond (1991) showed that younger firms and firms with little collateral built up are very dependent on banks loans to running their business. This is the case for firms in the SME category, which have proved to be very dependent on bank loans. The banks however do not really support in this dependency and are not very willing or unable to grant loans. Ivashina (2010) presented
evidence on this in her paper that showed that around the crisis SMEs were most affected by the drying up of bank lending. An OECD report agrees, referring to data from the ECB bank lending survey and the Survey on the Access to Finance of SMEs in the euro area (SAFE) that showed that since 2009 banks’ perceptions of increasing macro and micro risks as well as the firm-specific outlooks, in particular for SMEs, have played an increasing role in the tightening of business credit standards and reduced the availability of external financing. According to this data, smaller
companies are most vulnerable and affected. It showed that just under 25 per cent of euro-area SMEs faced some sort of financing obstacle when applying for a bank loan.
Yet SMEs are crucial in driving economic growth because they are proven to be key generators of employment and income, and accelerators of innovation and growth. (Schiemann, 2009). SMEs employ more than half of the private-sector labour force in OECD economies (Leahy et al., 2001). Given the importance of SMEs in all economies, they are essential for stimulating much-needed economic growth after the economic downturn we have experienced.
That economic downturn, labelled as the Great Recession, has exacerbated the challenges for SMEs to gain access to capital. Either voluntary or by regulation, banks were put into a very difficult situation, jeopardizing one of the most important sectors of the global economy. The more these firms depend on banking loans, the more sensitive they are to bank shocks like we saw around the crisis. Ivashina (2010) has showed in her research that SMEs are dependent on banking loans and that they are most hit. Bernanke et al. (1999) commented on this by saying the theory underlying the financial accelerator suggests that borrowers facing relatively high agency costs in credit markets will bear the brunt of economic downturns. This is also called “the flight to quality” where banks are less willing to lend to SMEs because of their higher agency costs. In addition, reduced
spending, production and investment by high-agency-cost borrowers will exacerbate the effects of recessionary shocks. These facts combined are fairly strong evidence, at least for the case of the SMEs, that economic downswings affect both access to capital and real economic activity. Iyer et al. (2014) add to this, saying that weaker banking relationships between banks and smaller sized-firms also mean that credit supply reduction is more significant for these sized-firms, because they cannot compensate the lending shock with other sources of debt.
Despite the importance of the SME sector for economic growth it has clearly experienced a funding problem. One of the reasons for this issue has been that the finances of SMEs are characterized by high complexity, yet are low scale. Driven further by the regulation, banks have reduced their exposure to smaller businesses in recent years. FinTech could be another way to resolve the mismatch between supply and demand that exists in the capital markets, so both borrower and lender are supplied better.
2.2. FinTech
FinTech is the abbreviation of Financial Technologies. It is also referred to as “the technological innovations that bring financial solutions” (World Economic Forum, 2015). The period after the credit crisis has clearly shown the need for those solutions. According to earlier research by Arner et al. (2015), the technological innovations that bring financial solutions have been present for decades but always come in waves. The financial crisis of 2008 is part of the reason we are entering a real new paradigm in FinTech (Arner et al., 2015). Before the crisis, the term FinTech was not used and this paradigm is the one that put the name FinTech on it because it had the biggest disruptive impact to date on the financial ecosystem.
In this paper, with FinTech we refer to the situation after the financial crisis of 2008, which is also called FinTech 3.0. (Arner et al., 2015). The technical issues around the distinction of these waves are explained in the appendix.
FinTech’s goal is about leveraging technology to circulate money in a more transparent and efficient manner. This is precisely what the financial services industry needs: by circulating the money in a more transparent and efficient manner, those that are capital-constrained get access to capital. According to a report by the World Forum (2015) , the mismatch between the supply of traditional banks and demand of SME lenders could possibly be solved because of the technology that FinTech uses, such as Big Data and Artificial Intelligence. These techniques are more efficient and effective at responding to the lower-scale market, which is exactly the market which is lacking
access to capital by banks. This advantage over traditional banks can be realized if these modern technologies are used appropriately to decrease cost and reduce subjectivity in lending decisions. It would make FinTech firms more cost-efficient by cutting out a lot of fixed costs, which is the first advantage over the traditional banks. On top of that, by using modern technologies, they reduce subjectivity in their lending decisions. These two factors combined might lead to improved access to capital.
Another factor that enables FinTech firms to tackle some of the issues the traditional banking model has is the fact it is less subject to regulation and supervision (Moving Mainstream, EY). This is contributing to their more efficient and less costly processes of lending. The innovations of the FinTech platforms are also more likely designed for short-term financing, which the banks have traditionally been unwilling or unable to provide, even though SMEs have very often been looking for short-term financing.
Figure 2
Looking at the quantities on the figures above, it is important to stress 2016 was year to date, which means in Figure 1 & 2 only first two quarters of 2016 are accounted for. Thus we may not conclude growth decreased last year, as this is not true. In fact, looking at the figures, FinTech investments has seen huge growth especially in the US, mainly because of its size compared to Europe.
2.3 Consumer lending
It is not only small businesses that need capital; consumers are also applying for loans for several reasons. This article showed (Avery et. al, 2004) consolidation of the big banks in the last 20 years. This means that banking institutions have merged into larger organizations. In the case of
consolidation, banks are likely to reduce the share of their portfolio in small loans, according to the article. So the bigger the bank, the smaller the chance an individual consumer client has access to capital. Avery et al. (2004) studied consumer lending and showed that a borrower’s financial strength is crucial for its ability to obtain secured and unsecured credit from financial institutions. Financial strength has been lacking for Millennials (Invincebles, 2011). Wide research have been done about “Milennials" the so called generation Y. Millennials are the youngest generation currently in the workplace that are generally thought of as those born after 1980. This generation which is very often highly educated but also high in debt, seems to struggle to find external capital Invincibles, Y. (2011) Another group that also has shown to be capital constrained are students because there is less income and less financial history present, but they do have shown high potential and good future prospects. Yet do they struggle in their access to capital.
2.4. Alternative lending
We have seen that businesses and individuals have increasingly struggled to access capital: especially the SMEs on a business level, and millennials and students on an individual level. FinTech might offer some solutions to innovate and disrupt the traditional services industry. Regarding improving the access to capital, the most important thing to research is the alternative finance forms FinTech has delivered.
Figure 3
Figure 3 above shows the growth of alternative lending in Europe. The overall European alternative finance market, including the UK, grew from €487m in 2012 to €1,211m in 2013 to €2,957m in 2014, with an impressive average yearly growth rate of 146%. The UK is responsible for the largest part of the alternative lending market. Historically UK have always been equipped with one of the best developed financial systems with London as the most important factor. The UK, as an
innovative leader in alternative finance, dominates the European market with some of the most advanced online platforms and sophisticated alternative finance instruments.
Figure 4
In the US, the overall alternative finance market grew from $4,40 billion in 2013 to 11,56 billion in 2014 to $36.17 billion in funding in 2015, up 213% from the $11.56 billion recorded in 2014. In contrast, the US market recorded a 163% annualized increase between 2013 and 2014. The US is responsible for 99% of all online alternative finance activity in the Americas ( North & South America) .
Two categories that are responsible for the biggest part of that alternative lending market lending both in the US and Europe could be distinguished, namely Peer-to-Peer lending and Crowdfunding. These categories can be subdivided into Peer-to-Peer Consumer lending, Peer-to-Peer Business lending, Reward-based Crowdfunding, Equity-based Crowdfunding. I will first discuss Peer to Peer lending and then Crowdfunding. Figure 5 of the Europe volumes illustrates how they relate to each other in terms of size. In the US however the Peer-to-Peer Business lending market is bigger than the Reward-based Crowdfunding market. Figure 5
1. Peer-to-peer lending
Peer-to peer lending is the first main alternative lending platform FinTech has delivered that is having an interesting impact on alternative lending in the financial services industry. Peer to peer lending is defined as financial transactions that occur directly between individuals without the intermediation of a traditional financial institution(Lee & Lee 2012, Herzenstein 2008, Galloway 2009).
The rise of the internet has seen a lot of online platforms being created in all sorts of industries. This has made it relatively easy to "cut out" the middle man, which we have witnessed in a lot of
industries this century (Heeks, 2010) and something Mrs Dorrestijn confirmed as well. Peer-to-Peer lending has beeen applied to the lending market: by creating an online platform with the use of social networks (Lin,2009) money can be exchanged in a more efficient way by cutting out the middle man, the bank. Nowadays the name has evolved to Marketplace Lending Platforms (MPLs). It started as Peer-to-Peer lending in which money was provided directly from the lender to the borrower through an internet platform. The most recent development in P2P lending markets is the increasing participation of institutional investors. (Kafer, 2016). These are banks, hedge funds, pension funds or other business entities that lend money through the platforms. For this reason the overarching name often used is MPLs. Detailed estimations diverge, but they agree that institutional investors now make up the majority of P2P lenders. While authors such as Wei (2015) state that their share is around two-thirds of all P2P loans, some estimations report an institutional investor share of more than 80% (Cortese, 2014). Both these authors recognize that the term ‘P2P’ lending is thus in fact no longer appropriate, Prosper, for instance, even expressed their intent to create a balanced investor base among retail lenders, wealth managers, and institutions. Hence, the term ‘marketplace lending’ is gaining importance.
Not only has the term MPL gained importance, but this form of lending has also experienced rapid growth in recent years. What started with Zopa (the first Peer-to-Peer network in the UK in 2005) and Prosper ( the first in the USA, in February 2006) has now grown to a sector in which billions have been lent out.
Growth in the US
It is estimated that MPLs in the US accounted for loan originations worth approximately US$23 billion in 2015 (see Figure 2). LendingClub, an unsecured consumer lending platform is the largest MPL in the US. The peer to peer consumer lending market is responsible for 71 percent of the total alternative lending market in the US.
Figure 6 Growth in Europe
An overview of marketplace lending in continental Europe MPLs in continental European markets shows they have not benefitted from the same government support or regulatory approach as their counterparts in the UK. A deeper-rooted cultural aversion to risk than in the UK may also have constrained growth. This may explain why MPLs in continental Europe originated just €669 million in loans in 2015 ( Figure 3), while UK marketplace lenders originated £2,739 million (€3,513 million) (Figure 4). In continental Europe like in the US , the consumer lending market accounts for the bulk of marketplace loans (Figure 3). The situation is different in the UK, where both the consumer and business lending markets are well developed. Figure 7
As said before, the financial crisis in 2008 led to the situation where banks either granted no loans or presented less attractive conditions to the borrowers. Therefore borrowers have been searching for methods to get access to capital or get lower rates on loans. In addition, lenders/investors have been looking to get a higher rate of return on their investments as the deposit rate is historically low. Historically, banks were the leading player in allocating credit, in part because they were best equipped to assess the credit of borrowers (Diamond, 1984)
The question is wether the market is able to assess risk with these modern platforms without the intermediation of the banks. As I stressed earlier, it is crucial for the economy that enough access to capital is provided, in particular to the right people. If the P2P platforms can better assess the
creditworthiness of borrowers, combined with the fact they have proven to be more efficient in various ways, it might improve the access to capital by giving better rates and less risk around the creditworthiness of borrowers.
Most P2P lending platforms provide an overview of the financial characteristic of the borrower to the lender as the main indicator for creditworthiness. This is often determined by external rating agencies that aggregate personal and financial characteristics to a credit score (Klaft, 2008).
In P2P lending, the assessment of this creditworthiness is obviously most often done by people who are not financial experts, in contrast to traditional financial services where the banks do this. In terms of ability to screen, a concern is that P2P markets are likely to have lower individual financial expertise and experience to judge borrower creditworthiness. A possibility however is that the opposite is true and that ‘insider knowledge’ of a market has an advantage. For example the lender could have expertise about the market the borrower has an entrepreneurial business plan for, so can better screen the viability of the business plan. Wolferts and Zitzewits (2004) have shown that there people who are not financial experts can extract that information effectively by themselves.
Apart from financial information through credit scores, the platforms provide additional social information about their borrowers. P2P markets may also make better use of social network information. In a similar vein, Lin et al. (2009) find that stronger and more verifiable relational networks help reduce the adverse selection problems in Prosper. Thus, the possibility of adverse selection further enhances the value of screening borrowers in these markets.
Finally, gathering information in these markets could lead to better judgment of the
creditworthiness of borrowers. The wide variety of individuals may collectively be better able to judge parts of the borrowers’ information, particularly the non-standard or subjective aspects.
2. Crowdfunding Definition
Ethan Mollick defines crowdfunding as follows: “Crowdfunding refers to the efforts by
entrepreneurial individuals and groups – cultural, social, and for-profit – to fund their ventures by drawing on relatively small contributions from a relatively large number of individuals using the internet, without standard financial intermediaries." The website kickstarter.com is the biggest crowdfunding platform to date. It was originally set up for creative purposes, and was used in the music and art industries before it was adopted by all kinds of industries to funding their business (Schwienbacher, 2010).
In the transaction process of crowdfunding, three players are involved. The first one, who is providing the capital, and is thus the ‘the investor’, is the crowd, which in principle is everybody around the world who has an internet connection. The second one, ‘the founder of the project’, implements their business with the received capital. The third one, the website, is the middle man, providing a platform where entrepreneurs can post their business plans and enthusiasts can offer financial support (Ordanini, 2011). Crowdfunding has big potential in the FinTech industry by creating a platform for collecting finance from a large group of people to set up projects or ventures. In recent years, it has proved to be a viable way of funding new ventures.
One difference with traditional bank lending is that with crowdfunding, for example via Kickstarter, it is also possible to borrow relatively small amounts of money. We have seen that especially in the area of small loans the traditional banks cannot match customers' demands due to high fixed costs. (World Forum,2015).
On top of that, crowdfunding is very versatile. Not only can it be used for the conventional reason of demand for capital, but it also serves a different goal. A very special characteristic of the platforms is that they can be used by initiators to demonstrate market demand for a proposed product. This is confirmed by Ordanini (2011) who states crowdfunding goes beyond conventional social-network participation by incorporating more proactive roles for consumers, such as selecting new initiatives to support and provide financial backing for them, and so showing market demand. It has been shown that in the case of successful projects that got funded or even overfunded, banks were willingly to finance them after they got their money from a platform. Thus in effect it can lead to funding from more traditional sources because the initiatives can prove they have market
An example of this is ‘Pebble.’ Funding for this smartwatch was initially rejected, but after they raised enough money via crowdfunding platform Kickstarter venture capital-backed money was secured, as the crowdfunding showed there was a big demand, and so proved that there would be returns on investment.
According to Espositi (2012) and Kara Bell (2013), there is a wide belief among industry observers that crowdfunding is going to play a bigger role in funding in the future, especially with equity crowdfunding becoming legal in the US.
Models
Five different crowdfunding models have been distinguished: the donation model, the lending model, the reward model, the pre-purchase model, and the equity model (Bradford, 2012). In the donation model people donate money to fund the project. Most of these projects are non-profit. The ‘investors’ in those kinds of donation projects can better be seen as offering support out of goodwill. According to Belleflame (2013), 22 % of the projects follow the donation model.
The lending model can be divided into two types: one where the lender supplies money without asking for interest, and the second one where interest is accrued. The second one is of course used more. Normally the first one is supplied to entrepreneurs who need to invest, while the second one is usually supplied to individuals who want to use it for their own consumption/expenses. In some cases, the lending model is very similar to the donation model. This is particularly the case where the interest rate is zero, as no profit is made with this. (Mollick 2012)
The two forms that have been attracting and supplying the most money are the equity based crowdfunding and reward-based crowdfunding.
With 76.5% of the projects the most used form of crowdfunding is the reward model, which is almost the same as the pre-purchase model (Belleflame 2010). With the pre purchase model early investors get a discount on the product in return for their early capital support. If the entrepreneur is planning on selling his bikes for $500 in the future the early funders will get one for $ 450. With the reward model, in stead of a reduction on the price of a product, investors will get a ‘special reward’ for their early funding/support. This reward could vary from an invitation to a premiere, to a unique item of the business. (Bradford, 2012) Reward-based crowdfunding – which, for many people, is synonymous with crowdfunding and online fundraising – has certainly captured the public imagination and media attention across Europe in recent years. With €120.33m raised in 2014 (compared with €63.18m in 2013), reward-based crowdfunding is the second largest sector within
the European online alternative finance market (excluding the UK), with an 127% average growth rate over the last three years10. In the US reward based crowdfunding grew from $ 435.59m in 2013 to $ 506.31m in 2014 to $645.70m in 2015.
In the equity based -crowdfunding model the supporters get shares of equity in return. This process is subject to financial regulation, just like selling stock. The equity model was made legal in the US with the JOBS Act in 2012. In the past government was scared that the funds would not be used for the promised plans so they prohibited them. To help small businesses gaining more success with their funding they passed the JOBS Act bill. In Europe it reached €47.45m in 2013 and €82.56m in 2014, excluding the UK figures. Although this segment is very small in comparison with the total European early stage investment market, which was estimated to be worth €7.5bn11 in 2013,
equity-based crowdfunding is growing fast, with a 116% average growth rate in the last three years. In the US this market grew grom $ 86.29m in 2013 to $ 271.80m in 2014 to 596.00m in 2015.
3. Methodology
With qualitative research through a literature review and on the basis of in-depth interviews the answer to my research question is provided. These interviews are held with five specialists who all have wide ranging experience in the FinTech sector in different backgrounds to capture the best insight of the impact. By doing a field research capturing the insights of these specialists and the exploration of the theory a good view of the impact of the FinTech alternatives regarding the access to capital is provided.The interviews were based on fixed questions for each specialist but if he or she stressed relevant items regarding the research question I deviated from the fixed questions where needed.
1. Conny Dorrestijn, VP Global Payments Marketing FIS I felt that gaining the knowledge of a highly informed well known FinTech expert with years of experience like Conny would be a significant contribution to gather developments of the FinTech industry. The fact she is a well known keynote speaker on the FinTech topic all around the world guarantees her incredible accomplishment.
2. Diederick van Thiel, CEO Advice-Robo
I felt that gaining the knowledge of an entrepreneur like Diederick who has build a career in traditional banking but quitted to start a truly disruptive FinTech firm that is active in automated credit lending would gather essential information from technical insights, barriers to entry and where the industry was heading in the future. On top of that comes his academic experience in economics which confirms his knowledge to be a good foundation.
3. Raghavendra Rau, Sir Evelyn de Rothschild Cambridge Professor of Finance It was important when conducting the research to gain a macro economic overview from an academical researcher on the field of economics and alternative finance. Mr. Raghavendra Rau is one of the highest acknowledged economical academics who is tracking these developments very close and is one of the best in his field and provides an academic insight into the sector.
4. Don Ginsel, CEO Holland FinTech
I felt that given his experience in traditional banking and having founded the institution that
Holland FinTech is gathering his knowledge would be a significant contribution to the information around the research question.
5. Rene Frijters, CEO Knab
I felt that gaining the knowledge of an entrepreneur that founded a FinTech firm like the first fully digital bank in Holland would gather essential information from barriers to entry and where the industry was heading in the future. He is familiar with his competitors in the new banking landscape and the ways banks are working and are developing into the future.
4.1 Findings
In this section I will first describe what is important in defining FinTech and give a brief view on its growth. Then I will discuss how the platforms benefitted from the growth of FinTech investments overall and how institutionalizing stimulated it even more. After that the mixed views around the field of the opportunities of P2P to disrupt the traditional lending models will be discussed. I will then answer the research question what the impact of the P2P platforms and crowdfunding has been on the access to capital for businesses and consumers and give explanations for both. I will show how the banks reacted to this and then I will conclude the section with a recent development that could improve the access to capital drastically.
Defining FinTech
Studying the way FinTech has affected access to capital, Mrs. Dorrestijn stressed it is important that FinTech is defined appropriately. According to her, the aspects a firm needs to be qualified as FinTech are; 1) 21st-century technology 2) a new way (online) of supplying financial services to a much broader audience and 3) driving changes in society and behaviour that cannot be turned back. Those 3 factors combined FinTech in this research. It is these technologies that really spurred the FinTech boom after the financial crisis and created so many disruptive powers for traditional models. Mr. Ginsel stressed this as well. It is after the financial crisis that financial services started using these new technologies better and a behavioural change began in society about how we handle the financial services industry. Moreover, if we define it like that Mrs Dorrestijn comments in terms of growth we can hardly speak of a FinTech bubble. Mr. van Thiel said that the amount of money being invested is still growing but the growth of number of firms is not increasing anymore. Growth
The growth of FinTech investments after the financial crisis has been large both in the US and in Europe according to the experts. This growth in the US can be explained not only due to the fact is is such a large country, but because of the huge opportunities their as their financial system is very anti-crated despite being home to the latest core technologies like Big Data and Artificial
Intelligence which are all centered in West Coast of US. ( Mrs Dorrestijn & Mr. Ginsel). An example is that with the US having such an antiquated financial services system there were huge opportunities for payments wallets, which are P2P payments through phones. So these have been a big succes in the US, whereas in Europe they did not have much success as people do not needed them: our good banking infrastructure takes care of it instantly. The UK has always been the financial centre of Europe and this has been the case for FinTech as well. Mrs. Dorrestijn described the UK as ‘the America of Europe’ : entrepreneurial, forward-looking, with a higher risk appetite than the rest of Europe. An example is the 46 newly licensed banks in England. Here we see that
politicians with their regulations have an import role as well. Overall the US is bigger but Europe is better than the US at integrating the innovation of FinTech into its core business.
Institutionalization of the platforms
One of the results of the huge growth of investments in the FinTech industry are the lending platforms have benefitted from this in terms of growth as well. Another reason is the
institutionalization. P2P lending started as a one-to-one lending platform to move money from the borrower to the lender. This was ideal for lenders who were short of money and wanted access to capital, and borrowers who had money to invest and wanted to earn interest. Something Mr. Rau, Mrs Dorrestijn, Mr. Ginsel and Mr van Thiel have confirmed is that we have seen a switch from institutional to peer lending where the institutional players such as pension funds and equity investors have been putting their money through those platforms as well. These players know it is not as secure as a bank but it is relatively secure as default rates have been low and they can increase their returns on their money instead of sitting on it. This is a result of the historically low interest rates following the financial crisis. So there has definitely been P2P lending but the platforms have evolved, and a lot of money now comes from professional investors. Theses big institutional players have contributed to the growth of the platforms. So FinTech firms, and the platforms, have changed the way we access capital in a few ways.
P2P disrupting the model
Obviously with this significant growth P2P start-ups feel they have a real opportunity to disrupt the traditional lending model of large financial service corporations. However, we must look at this from a much broader perspective. There are different views around the industry about whether P2P platforms offer serious competition to the traditional financial services industry. But they are certainly having a noticeable impact as P2P platforms in the United States alone issued over $25 billion in loans in 2015 (Alternative lending report, Americas). Currently, P2P lending is still not a serious competitor to banks in size right now according to Mr. Ginsel. However, within the next ten years we should see serious competition emerging, Mr Ginsel says. He also points out that there is not enough liquidity in P2P lending to compete with the sheer size and volume of the liquidity in traditional lending. There is a place for it and certainly a growing market but, in Mr. Ginsel’s eyes not enough to be considered a serious competitor.
Disrupting the lending platform is very likely but as Mr. Ginsel stressed the banks still have the advantage of their huge customer base. Both Mrs. Dorrestijn and Mr. van Thiel admitted that is a crucial factor but very expensive to acquire. Mr. Ginsel points out that the first step for a lot of the SMEs when they are looking for capital is still going to a bank because they are still probably not aware of P2P lending at the moment. The firms that already exist may have good relationships with
their traditional banks and are simply not aware. Mr. van Thiel and Mr. Frijters explain this by arguing that finance is a low involvement/attention product : although 80 per cent of the people tend to be focused on earning more money they do not pay much attention to their financial services. Mr. Frijters illustrated this by asking me which bank is handling my financial services, and why. My answer was ING, because my parents opened an account for me when I was a child. The reason I never changed was indeed low attention/involvement. This has allowed the banks to react as slowly as they have. Because of those factors a lot of banks have not been really punished yet by the disruptive powers of FinTech. Because of this the majority of P2P lenders are not big enough yet to compete with the banks.
But since the financial crisis of 2008, the traditional banks have incurred huge brand damage and if you combine this with the significant regulated claims on the financial services industry, it has opened up opportunities in which P2P perfectly fits, given their low-cost online characteristics. Mrs. Dorrestijn thinks P2P has large potential specifically for curtain niches and believes banks have had their shutters down for too long and put themselves on a pedestal. The increased need of SMEs to access capital more easily in order to grow their business is a clear target market that has been neglected for the wrong reasons.
The question is whether these FinTech platforms are competing or cooperating with the banks in the access to capital. In other words : are they going after the same market for their lending activities ? According to Mr. Rau research has shown the P2P platforms are competing with the traditional banks in the access to capital. This means that the people applying for loans at P2P platforms are the same ones applying for loans at banks. This immediately leads to the question of whether these FinTech platforms has been complementary to the traditional banks. That is do the platforms serve as an appropriate alternative to the SME group where the banks are not willing or able to lend.
4.2 Business lending
Mr. Rau gave insights into whether these P2p platforms have been an appropriate substitute to bank financing. Research has shown that 75 per cent of the SMEs went to a traditional bank as a first step for funding. Only 22 per cent of them got their loan granted from a bank. In other words, more than half of the SMEs who applied to a bank for a loan got turned down. Their loans were not granted because they were presumed to be not creditworthy enough. It turns out the assumption of those SMEs not being creditworthy is not true. Instead they opted for a P2P platform. Their actual credit ratings look bad on paper but they turned out to be of significantly better quality than the clients many of the traditional banks give money to. This is because the new platforms assess risk with more than only hard financial data.
Risk assessment
The traditional banks usually only use a FICO score, which is a credit score based on financial data as payment history, debt burden, length of credit history etc. The P2P platforms use a FICO score combined with all sorts of other public data such as the type of the visitors web activity for instance. Mr. van Thiel, who is obviously active in this sort of big data risk assessment, confirmed this by saying that with the use of those new technologies, creditworthiness can be assessed more precisely. Because of this these platforms are valuable in making access to capital possible for some SMEs. After the platforms have provided capital and the SMEs have had success the banks have admitted their shortcomings by then granting loans them loans. Quoting Mr. van Thiel: “ that is actually admitting you are less able in assessing credit risk, but since you have proved yourself through a more efficient platform, we want to support you now as well.”
Peer-to-peer loyalty
According to Mr. van Thiel, another reason is the importance of social networks controlling safety. He says the social element and the possibilities of checking online behaviour is something banks are not able to do, at least not easily. Mrs. Dorrestijn reinforced this by talking of a presence of ‘peer-to-peer group loyalty’. The ability to check social characteristics through those platforms has increased the probability of getting access to capital as people not only have more knowledge about but also more loyalty to their own peer group. An example Mrs. Dorrestijn brought up was if somebody would be willing to lend to a motor club. The instant generalized reaction from an
outsider not in that peer group, also banks, would be that motor clubs are dangerous and violent and so would refuse to lend to them. However this would not be checked by someone from the same peer group who might be better in assessing the situation of the potential borrower. This shows that peer-to-peer group loyalty has also increased access to capital as insiders are better equipped at judging their own peer group.
Geographic factors
Local knowledge improves the way P2P platforms measure whether a business plan is viable says Mrs. Dorrestijn. On top of that, the local effect increases the engagement of the investors, as they might value a project more if they have certain feelings for the region they want to stimulate.
Coombeshead Farm, which I discussed in the intro, is a perfect example of this, as the reason for the lender of that project was that it would stimulate the local area in which he was living.
Mr Rau. says concluding that for SME business lending the P2P platforms are complementing the banks in terms of access to capital. They are really giving access to capital to clients who did not have it before for the wrong reasons. Due to better risk assessment, local knowledge and peer to peer loyalty these SMEs could be better estimated. Because these people who have sufficient creditworthiness should have access to capital to stimulate the economy as explained in the literate. This illustrates the fact that banks have failed to give access to capital to this specific group who needs it to stimulate economic economic growth. Thus for business lending the traditional banks have been complemented by the P2P platforms and they served as an appropriate alternative lending platform.
Crowdfunding effect on SME business lending
Although the crowdfunding market is also still small, the growth figures have been very high, and it is projected to keep on growing at the same pace. For SMEs in the Netherlands, crowdfunding was the most popular alternative source of lending between 2008 and 2016 (Mr. Ginsel). Within the SME group, it is small businesses that have the biggest demand for crowdfunding. Mr. Frijters admitted that this one of the reasons he added a crowdfunding platform to his digital bank Knab, to cooperate with and serve entrepreneurs from SMEs. He explained that not only digital banks around Europe like his Knab but also the traditional banks have experienced high demand from small firms, which they can better serve through a crowd platform. Mrs. Dorrestijn and Mr. van Thiel both argue, it has had the biggest impact on the access to capital, for the reason it has drawn the most money to the right initiatives. Mr. van Ginsel confirmed this by emphasizing the special character of reward-based crowdfunding models. It is as explained in the literature review a new model of doing market research and getting confirmation from the crowd that the product or business is viable. New startup businesses looking for external funding usually try crowdfunding because raising the money doesn't depend on the business's current cash flow or profitability. Crowdfunding campaigns are often based on how many people believe in your business model and idea, so if SMEs can get funded is more about the story than the cold hard numbers. This is can also be seen as assessing risk, but then in a whole different way. That is a tool the banks do not have, but has
4.3 Consumer lending
We see different results the consumer group according to the research of Mr. Rau. The consumer lending group do not have things like financial statements, balance sheets and income statements. What is shown in the research is that consumer market individuals borrowing money through those platforms are basically the same ones who the banks were lending money to. Thus in the consumer lending market the P2P platforms are substitutes to traditional banks and not complements as in business lending. These individuals preferred the platforms over the traditional banks as they would have got their loan approved at the bank as well. Mr. Frijters argues that consumer lending should be avoided by most people, especially big amounts, as people who work need to save and consume after instead of the other way around. However Mr. Frijters asserts, that for specific small groups, such as students, borrowing could be of great value to lend as they are capital constrained but should earn more in the future. Mrs. Dorrestijn totally agrees that especially for specific groups it has been an appropriate substitute. The reason they have found their way through the platforms for consumer lending are because the P2P platforms are developed for their niche and delivers the product with such a better customer experience in many ways.
Customer experience
The reason customer experience deteriorated and customers previously have not been treated the way they deserve is the traditional banks have lost attention in low scale customers they said they could not earn money on before the crisis. Conny illustrated this by giving a wonderful example. When working in 1996 before the crisis, traditional bankers would speak of “bad customers’’ they were unwilling to lend money to because the amounts were too low and they could not earn enough profit on them. She was amazed and argued there is no such thing as a “bad client”. In fact it showed the business models did not fit to lending to those clients. As I explained above, credit lending is very costly for the traditional banks because of the long and expensive process of screening and their high fixed costs. The increased regulation enhanced this even more because a result was the small and big loans went through the same long and expensive processes, which ultimately made small loans unattractive for the big traditional banks. This meant that they withdrew from them, because they could not earn as much on the big loans, as the costs of the processes were almost the same.
Conversely the new FinTech platforms have transformed the traditional business models with their new technologies, which are more suitable for lending to every individual client (Mrs. Dorrestijn). The result has been that where the banks were unable or maybe unwilling to change their business models to serve every client, the low scale markets are now better served by FinTech platforms who are indeed able to serve this group better with their new more customer orientated business models.
(Mr. Ginsel) Mrs. Dorrestijn stressed that we have seen a switch from a situation where the traditional banks possess all the power and deliver the products they want to the customer, to a situation in which this imbalance is restored and the customer is put in a position where they are more empowered. The new technologies enabled these new FinTech platforms to put the customers in a more central role again, meaning improved customer experience. An example of that is the approach that Mr. Frijters follows with his digital bank Knab. He described his new approach that improves customer experience, which entails more transparency, lower costs and customers are put more in central point of attention. Examples of this are: the bank warns customers in advance if they are paying to much on their current account, uses customers to develop new products and on top of that customers get better rates. In his opinion that is the model for the future and something he argued was unseen before the crisis. These are not only possible because of the new technologies available but the way these FinTech firms make use of them by integrating the customer a lot more are unmatched by traditional banks. While Mr. Frijters was the first to do this in the Netherlands, he admits challenger banks like his Knab have also been founded all across Europe and US, like Fidor in Germany and Simple in the US.
Increasing competition leads to a reaction
Thus the P2P platforms have showed to be a good substitute for consumer lending because of the improved customer experience. The FinTech platforms have not only improved the situation by creating alternatives that have proven to be viable and good alternatives for SMEs but they have also increased competition, which is always good as it stimulates disruptive power (Mr. Ginsel). Thus because of the extra competition they challenged the banks. At first according to Mr. van Thiel the banks were not afraid, but when FinTech got really big they started to think: we might need to change something. According to Don Ginsel, all those FinTech firms working on alternatives has clearly led to a much higher adoption level by banks. They have changed their visions, and increased their innovations around these FinTech developments, for example by becoming more customer-orientated or starting platforms themselves.
The really innovative banks have responded by lending to their SME clients through partnerships with the FinTech startups. According to Mrs. Dorrestijn, Mr. Ginsel and Mr. Rau, the traditional big banks became aware that they could make money lending to people they used to be unwilling to lend to. We have seen all sorts of partnerships by banks with alternative FinTech lending platforms to serve their SME clients: Santander with P2P platform FundingCircle, JP Morgan with online lender OneDeck, and BNP with Smart Angels, a crowdfunding platform. Conny explained that Santander invested money into FundingCircle to serve their SME clients. If an SME asks for a loan
it is redirected to the platform and gets a loan approval within a day. This has improved not only SMEs' access to capital but also their customer experience. This has resulted in a better relationship in which the client is more willing to do more business with Santander.
So the high disruptive power of FinTech firms has led to lending to clients that the banks were not serving. Banks have slowly adapted by putting money and working together with the platforms so that they could serve their clients as well as acknowledged by all the experts. The perfect example of the future bank is Knab because they want to become a financial platform that serves their customers the way that Airbnb serves people renting apartments. They have built a platform, and have made sure the platform is the best possible where customers can find everything. Everything is done in order to serve customer in the best way.
Thus the success of the FinTech platforms has actually led to a late but now high adoption level in innovative big banks (Mr. Ginsel). They have started to take it to another level in terms of
innovation and integrating technology and putting in place accelerator programmes or incubator programmes luring new young graduates to generate new ideas (Mrs. Dorrestijn).
Stability of P2P lending
However, an important thing to keep in mind, according to Mr. Rau, is that P2P platforms have not yet experienced downturns. Thus the impact FinTech has on the access to capital has not been tested in other situations. Only Zopa started before financial crisis. So in other words, what we are looking at is a situation in which the alternative platforms are being establishing at a point in time where the market is going up and has not experienced a crash. None of these models have actually tested in a downturn, so nobody knows what will happen if the market actually goes down. The question for the future is: when there is an economic downturn, will there be less or more patience for cash lending than without the platforms? Mr. Rau 's prediction is that there will be less patience as, looking historically, individuals tend to hold on for a much longer period of time than institutions. So depending on the degree of institutionalization of the particular platform, he
suspects that the effect of a downturn will be different across different platforms. But indeed did the platforms changed the access to capital
4.4 Robo-advice
Diederick van Thiel pointed out to me that robo-advice can take credit lending to the next level by improving credit assessments significantly. As it is still in its infancy the impact has been small so far but it is going to play a huge role in increasing the access to capital in the future. New machine
learning and deep-learning algorithms leverage big data in order to minimize fraud and assess risk better than humans.
This can be seen as one of the latest trends in alternative FinTech lending. The concept of “robo-advice”– the use of automation and digital techniques to build and manage portfolios of exchange-traded funds (ETFs) and other instruments for investors – has gained significant attention within the wealth-management industry. Robo-advice is enabled by a technique called “machine learning’’. In the digital world with the internet and all the sources of new data we create in our daily life every person has become a data agent. But around 80 per cent of this valuable data in the world is still unstructured. The technology that can sort that unstructured data is called machine learning. Robo-advice uses machine learning to give people better and more customer-friendly investment Robo-advice. Technical algorithms (robos) are highly efficient in giving advice about portfolio management, without much human interference. Mr. van Thiel says the techniques have already proven to be of great value in the wealth management sector and is now being applied to the alternative lending platforms.
Robo’s & credit lending
The technologies that robo-advice uses to assess the creditworthiness of a borrower are significantly different than previous ones, and much better. The traditional banks have 1 source of data to assess credit history. With new techniques of machine learning, robo-advice structures and uses 5 sources of data. For people whose credit score could already be assessed, it can now be assessed better. On top of that comes the fact that some specific groups that could not be assessed before can now be assessed and also approved. An example of this is students with a short financial history, for whom no credit score could previously be estimated. Now with the technique of machine learning it is possible to assess the creditworthiness of such a person based on their ‘psychographic profile’ or ‘mobile profile’. Thus they can have a valid credit score, get their loan, start their business, make a profit with SME, and increase economic growth. Mr. van Thiel says this is making the access to capital easier, more efficient, fairer, and better for the economy.
5.1 Conclusion
The financial crisis that gradually appeared in 2007 meant banks needed to recover and rebuild. The probability that borrowers would default on their loans and mortgage payments increased because of the uncertainty all around the world. Nowadays, it is a struggle for entrepreneurs to find funding for crucial growth investments they need to make. Traditional banks are less willing to grant loans to SME owners and entrepreneurs, because these loans are judged to be of higher risk than before the crisis as a result of the fear of default. On top of that the banks are subdued by a massive increase of regulation and supervision, which means more loan applications are declined.
These new rules are known as the Basel III agreements and banks are obliged to them in order to prevent big losses and banktruptcy.
These extra requirements on the traditional banks makes it harder to access capital as less capital is available for lending.
The impasse is that banks are unable or unwilling to grant loans on the one hand, while on the other hand to stimulate the economy they should approve more loan applications. This creates a dilemma and many entrepreneurs and SME owners looking for access to capital, search for alternative financing options. Financial Technology innovations , also called FinTech has brought many
solutions. Two of them are Peer-to-peer lending and Crowdfunding. The trend in recent years is that these alternative forms have experienced growth of popularity due to higher demand.
The objective of this thesis was to answer the following research question:
“ What impact has FinTech had on the access to capital after the financial crisis of 2008 ?”
The P2P platforms do compete with the traditional banks in the market of access to capital. This means that the people who applied for loans at P2P platforms are the same ones who applied for loans at banks.
The effects of the P2P platforms on access to capital are different for business lending to SMEs vs. consumer lending to individuals.
For an SME owner in search for business lending through P2P platforms, the platforms are
complements to the banks in a way they have given access to capital to clients who did not got their loans granted at the traditional banks before. Due to better risk assessment with Big Data, the use of local knowledge and peer-to-peer loyalty the P2P platforms do estimate the case of these SMEs better. Banks failed to provide access to capital to this group who specifically need it to stimulate
economic economic growth. Thus for business lending the P2P platforms complement the traditional banks in a way they actually increased the access to capital and they serve as an appropriate alternative lending platform.
For consumer lending through P2P platforms we do not find the same results. Consumer market individuals borrowing money through those platforms are the same ones who the banks approve loans to. Thus in the consumer lending market the P2P platforms are substitutes to traditional banks and not complements as in business lending. There is no increase of access to capital, as this
individuals prefer the new alternative lending platform over the traditional bank mainly because of the improved customer experience in many ways.
So for business lending to SMEs the P2P platforms increased access to capital and are
complementary to traditional banking. For consumer lending the access to capital is not increased but the customer experience is improved, why it is a substitute.
The FinTech platforms did not only improve the situation by creating viable and good alternatives for SMEs but they also increased competition, which is good as it stimulated the disruptive power. As a result they did force the traditional banks to adapt and change their behaviour, innovate their business models and start collaborations with the FinTech platforms to give access to capital to their low scale SME clients as well.
Regarding the additional research question:
“ Are the main alternative FinTech lending platforms to bank financing, namely Crowdfunding and Peer-to-Peer lending, appropriate alternatives to bank financing, and if so which one is the most appropriate alternative ?”
The answer is despite being still small relative to traditional lending both Peer-to-Peer platforms and crowdfunding are appropriate forms of alternative finance. These two alternative lending forms, p2p and crowdfunding, both show growth and did increasingly provide access to capital since the financial crisis of 2008 and is expected to continue into the future. Firms and SME owners in need of capital do not only view these alternative forms as appropriate alternatives to bank financing, but in some cases even as a better form of funding. Especially people in specific niches are better served by those platforms. For an entrepreneur who seeks funds to start his project or to develop his idea crowdfunding might be better as it takes the story into account without having a track record.
5.2 Discussion
The market for access to capital has overall been democratized quite substantially as there are more solutions to finding access to capital and more people are finding finance, which in most cases makes the service more fair. More competition, means more efficiency and thus better results for the quality and quantity of the access to capital. In the old traditional financial services industry where people only had to rely on heavily regulated banks it was not very easy for every individual to borrow money. Creditworthy people should be able to apply and get access to capital approved much more easy. Banks not only need the FinTech solutions, in fact they needed the cultural change towards customers. FinTech has its disruptive powers, but the banks are actually helped by their new platforms.
The platforms are better in serving the specific niches demanding smaller and faster loans. Banks are going to push this off to either the platforms or make platforms for this themselves. So the platform lending business will be mostly focused on firms that are relatively small because they cannot compete on the big loans with the banks as that is still the first step for an entrepreneur in demand of a big amount of capital.
Especially if the banks are recovered and in the stage they can increase lending themselves, they will reclaim a share of the financial market. However, the position of the bank as a supplier of capital will be different than before the crisis. A lot of the growth of the platforms is facilitated by extraordinary conditions in which the banks needed to rebuild, were subdued to higher regulation and a historically low interest rate. Predictions are that when the banks have adapted to those new technologies, the way they are trying right now, and the interest rate returns to normal, the
platforms lose some advantages. What can be argued against is that the much younger aged digitalized customer group grows, the awareness of the platforms will also grow and banks have a hard time adapting as they have grown to such big institutions.
But the impact the platforms made in this specific economic environment is not small. However the question is for how long can they grow at this rates. Because the growth and innovations has been propelled by the big institutionalization of the platforms, but the high adoption level amongst the banks could mean the winners are not necessarily the innovating platforms but the adopting banks. As they have more strength because of their regulation and large customer bases.
In ten years time it is very likely it’s not called alternative finance, it will be defined as a services industry where every aspect is part of a platform driven by technology. Instead of having services in the hands of one giant bank that does everything, we are probably going to see a multi-player
market emerge offering an array of services that fall into groups. The challenge for FinTech will be keeping it moving forward while legally compliant.
5.3 Further research
There are also concerns around robo-advice, Diederick van Thiel has said. One of them is that machine learning is expected to make robos more intelligent than humans because they are self-learning systems. By building those robos they create computers that are more intelligent than ourselves. Building on that comes the fear that the technique will replace a lot of jobs. It is an even more disruptive power, which is able to take over a lot of jobs in the banking sector. Thus making the services more efficient with these technologies will create opportunities but also threats like unemployment amongst highly educated skilled people. This will require a transition period if techniques are optimized and systems are transformed from A to B. We do know a lot of jobs will be taken over but do not know how this is going to influence our society. In my opinion it will be very interesting to do further research on this.
Wide research have been done about “Milennials" the so called generation Y. Millennials are the youngest generation currently in the workplace that are generally thought of as those born after 1980. This generation which is very often highly educated but also high in debt and seems to struggle to find the capital. It would be interesting to see wether the platforms have increased access to consumer lending for this specific generation.
5.4 Limitations of my research
Although I conducted five interviews with very well informed experts from the FinTech sector as a basis for my qualitative research, there are a few limitations to the research.
The time available for the research prevented me from conducting interviews with more FinTech experts. The research would have benefitted from an interview with a FinTech start-up with business activities such as lending to SMEs worldwide. Nevertheless, the five individuals selected in this relatively short period of time have given an excellent view from a wide variety of areas within the industry.
