How data gives fintech lenders the edge over the big banks.

Banks are well-placed to enter the lending business in last-mile communities, but they face barriers to entry not encountered by some of their competitors – agile fintechs that are able to use data to transform the way they deliver financial services to their customers by offering targeted loan products based on accurate, real-time information.

The demand for digital loans has shot up across the world, both as a result of the COVID-19 pandemic, and as a consequence of increasing penetration of internet-enabled mobile devices. Indeed, according to the Global News Wire, the global digital lending market is expected to grow to USD 20.5 billion by 2026.

This desire is especially acute among last-mile communities – those in remote areas underserved by physical banking infrastructure. Although legacy banks are well-placed to enter the lending business in such markets, they do face barriers to entry not encountered by some of their competitors. 

These competitors – the agile, flexible fintechs – are armed with a powerful weapon: data, which they can use to transform the way they deliver financial services to their customers by offering targeted loan products based on accurate, real-time information. 

The data earthquake. 

Fintech lenders use disruptive technology, data services, and marketing tools to gain an edge over the legacy banks. They use customer data to inform their lending decisions, better target their customers, develop new products, and deliver credit rapidly and efficiently.

Digital loan management platforms gather and analyse data in real-time to facilitate more accurate credit reports, more efficient loan disbursement, and more reliable repayments. Data gives lenders a more holistic image of their customers, integrating information from different data sources to help them better assess risk, refine their products, and offer a more customer-centric service.

Digital loan management systems like Oradian’s can also operate seamlessly in remote locations with poor internet connectivity, allowing field officers to upload data to the system and synchronise with the network once connection is restored.

This means fintechs can make decisions about loans on-site – as well as disburse loans and collect repayments – without requiring customers to travel to physical locations.

This, in turn, helps digital lenders reach customers without access to traditional banking services or accounts, who may nevertheless still have a mobile connection. 

These fintech lenders are combining innovative data services with highly-specialised business models to offer more streamlined financial services targeted at specific communities or demographics. This enables them to gain a competitive edge over legacy banks, by offering a product that is more tailored, more flexible and more responsive to customer needs. 

By leveraging this accurate real-time data, fintechs are forging a new path forward in the financial services industry, one that may well threaten the position of established financial institutions.

Threatening the establishment. 

Legacy banks are now offering an increasingly diverse range of loan products, finally realising the potential of data and digital services in providing credit to businesses and consumers.

Many banks now use alternative data sources to perform better risk analysis, detect fraud, and provide faster, more targeted services to customers.

However, in some countries, banks simply leverage their reputation, influence, and critical mass to take the lead in the digital lending market, using their significant capital availability and institutional pull, rather than data, to gain a huge competitive edge over fintech lenders. 

In some markets – such as Vietnam – the regulatory environment simply forbids fintechs from entering the lending market without the backing of a legacy bank. This, it is argued, is an impossible hurdle for disruptors to jump. 

However, the agility with which fintechs can operate makes them particularly strong competitors to banks in some emerging markets. These fintechs are much more flexible than the older banks, which must contend with long-established practices, legacy systems, and stricter regulation, with data at the forefront.

Being light on their feet enables fintech lenders to rapidly target digital loan products to prospective borrowers, unencumbered by the limits of physical premises and integrating various data sources to gain unparalleled insight into their loan customers.

Competition or collaboration?

Instead of all-out war, fintechs and banks may increasingly choose to work together. Many banks would benefit from leveraging the agility of fintechs to provide access to digital services. Rather than competition, collaboration may be the future of the sector.

Indeed, innovative neo- and challenger banks are themselves disrupting the legacy banking sector, and they are much more willing to leverage the fintechs’ data services to deliver financial services and loan products to consumers.

Challenger banks offer those fintechs willing to collaborate with them the benefits of huge capital availability and a strong regulatory environment; fintechs, in turn, offer banks innovative technology and the ability to rapidly adopt it. They can help banks increase their use of digital core banking and loan management systems and improve their data usage and security.

Although the market is today defined by competition, the versatility and variety of fintech lenders means the scope for collaboration can only grow.

Is the threat real?

Although fintechs are often seen as the main competitors to established financial institutions, there also exists a sense that banks are relatively unfazed by the development of financial technology products.

That’s because banks still boast an enormous advantage over fintech disruptors: their reputation, experience, and institutional authority makes them formidable foes. Combined with their liquidity, resources and an ability to act strategically, banks can still mount a strong response to disruptive digital lenders.

However, the ability of fintechs to gather, analyse, and utilise data gives them a key competitive edge over cumbersome legacy banks. And in markets where collaboration is more prevalent, it provides the leverage they need to play a role in a sector still dominated by legacy institutions.

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