By Robert Leclercq, Associate Director, at KPMG in the Netherlands.
It’s hard to dismiss the concept of ‘crowdfunding’ after you see the impressive growth of the U.S-based Lending Club platform. With a loan portfolio of USD$4 billion – and nearly $1 billion in growth in the first quarter of 2014 alone – there’s little doubt that such upstart initiatives are making waves, and banks may want to find ways to join the ‘FinTech’ revolution, possibly through co-creation projects
Rapidly growing Lending Club is a prime example of a FinTech initiative that is beginning to transform the financial sector from the ground up. As the largest peer-to-peer lending platform in the world, Lending Club attracts private investors to lend directly to individuals and small business. With technology that helps it better assess credit risk and service loans more efficiently than traditional banks, the company offers lower rates and higher returns for investors. In fact, a growing number of U.S. banks now invest in loans through the platform instead of originating, issuing and servicing the loans themselves.
In addition to Lending Club, there are many innovative companies active in the field of P2P payments, (currency) transactions and even fully integrated banking solutions, each of which could force incumbent players to either adapt or to be sidelined entirely. FinTech firms have a number of advantages since they don’t have to cope with the legacy that burdens many traditional financial institutions: inflexible IT systems that were implemented over 30 years ago, a physical distribution network and labor-intensive business processes. As a result, FinTech solutions are more cost-efficient and they are quenching the rising demand by consumers for functionality, transparency and ease of use
Although most FinTech initiatives are relatively small and currently do not pose a threat to the market position of major financial institutions, their astounding rate of growth and the scalability of their platforms suggest that the banks should start acting sooner rather than later.
But how can established financial institutions best deal with these developments? Historically, innovation strategy in the financial sector has mainly focused on designing new financial products. But a rapid and adequate response to the disruptive FinTech initiatives requires a different approach, namely an open strategy focused on co-creation.
This collaborative route makes sense for both parties since, during the development stage, financial sector start-ups and small companies often encounter barriers. Through partnership with mature financial institutions, FinTech firms can access both growth capital and knowledge of critical industry issues, such as legislation and regulation. In turn, financial institutions can use the knowledge gathered to make strategic choices and set priorities.
We see this co-creation approach taking shape in the Dutch landscape. Rabobank recently signed on to support a Fintech accelerator bootcamp in London, to help fund and mentor fledgling FinTech firms. Meanwhile, ABN Amro launched the peer-2-peer lending platform Seeds last year and Aegon introduced its online bank KNAB in 2012, which runs entirely on the innovative platform of Dutch software developer Five Degrees.
While it may take time and effort to forge effective partnerships between creative entrepreneurs and risk-averse, conservative banks, such co-creation is likely a necessary response to the serious new competition that is emerging. In order to keep up with the fast-moving digitization of society, the banks will have to open up and embrace the coming transformation.