Have you been inside a bank branch office within the last month? Have you ever used your mobile phone to deposit a check?
Kabbage co-founder Kathryn Petralia asked those questions of the audience at a recent MIT Education Forum Atlanta panel called “The Future of Lending: FinTech Trends and Technology.” For those attending, the future appears to be now; not many hands shot up for the first question, but many more went skyward for her second query.
“And we’re old!” joked Petralia, her way of emphasizing that it’s not just millennials who are now viewing traditional financial services through the lens of software and apps.
Atlanta, with its legacy financial companies and an active fintech startup cluster, has a front row seat to these tectonic shifts in banking. State officials estimate that 70 percent of all U.S. electronic transactions are enabled by Georgia-based companies. But it’s local startups like Kabbage, which uses analytics and automation to lend to capital-hungry small businesses, and Tech Square’s GROUNDFLOOR, a real estate-based lender working with non-accredited, retail investors, that are leading this particular tech charge, not the banks.
“The biggest problem the banks have is they just don’t trust it (technology),” Petralia said. “They’re worried about verification, they’re worried about identity management. There are tools they can develop so they can develop a better trust relationship with their customers.”
Not that these tech trends mean banking will pull a vanishing act anytime soon thanks to their many resources and access to capital. But they can’t afford to wait too long to join the party, or else suffer the same digital disruptions as the media industry, now worrying about plunging subscription/advertising revenues and cable cord cutting.
“Some of them (banks) are going to partner with the Kabbages of the world, and get smart and integrate that,” said Brian Dally, GROUNDFLOOR’s co-founder and CEO. “Some of them are going to remain ossified and stick their heads in the sand.”
Joining Petralia and Dally on stage was Matt Burton, co-founder and CEO of New York-based Orchard Platform, a marketplace lending company. Donald Butler of Thomvest Ventures served as moderator.Burton pointed to the low cost of data storage and processing as an enabler for the transformation of lending thanks to better analytics. “If you can use an unlimited amount of data to make decisions, you’re going to be able to pull new insights out of it for every piece of the process,” he said. “Whether it’s underwriting or matching investors or providing better analytics to the end user, I think that’s something that people haven’t quite realized yet.”
A European mandate is underway to get banks to offer API’s so that third party companies can partner with them for enhanced analytics of customer-approved data. “Whether or not it comes to the U.S. anytime soon is anyone’s guess, but certainly there will be demand for it,” Petralia said.
Similar regulatory changes may be needed in the U.S., said GROUNDFLOOR’s Dally. “There’s only a certain amount of real estate lending they can do, in different real estate categories, to specific real estate investors, and that really hamstrings them from betting behind organizations that need lending.”
It’s a different obstacle between small businesses and banks, which are “hamstrung by their lack of access to technology,” Petralia said. “It’s very expensive for them to underwrite loans that are under $250,000..it’s not cost-efficient for them, so they need this technology to keep this customer base, to offer them other products.”
That need has sparked strategic partnerships for Kabbage with large banks, and she believes that’s the way forward for them. “The trends are moving away from vilifying financial institutions – ‘they’re old and behind the times’ – to partnership models. The rumors of the death of banks are extremely exaggerated. They have the lowest cost of capital access,” and also have that customer data that has become the currency of the digital age.
Other parts of the world that are farther along integrating technology and financial services could offer some lessons for the U.S. Much like many developing countries in Africa bypassed building landlines in favor of mobile phones, China has moved a lot of financial services directly to smartphones. “Phones in China are amazing, fully integrated,” Burton said. “Lending, payments, credit, wealth management. While we in the U.S. have a lot of those disruptive things – people here are targeting different profitable areas of banking, versus in China, where they’re all just called internet finance companies, and they’re just like behemoths.”
While all the panelists believe that consolidation is underway in the fintech space, there’s still more room for digitization of financial services. Burton said many asset classes such as auto loans and insurance haven’t been exploited yet. “There are still huge markets to go after on this side.”
GROUNDFLOOR’s Dally agreed. “There are a lot of opportunities for mass market consumer products in this space.”