Thoughts on the role of Fintech companies in the next wave of lending

A few days ago, I read this Medium post about the future of lending. The post really resonated with me and what I’m trying to do with Backbone.

I read the post as endorsement for Fintech companies to start providing credit to their customers as they show the most potential to start the next wave of lending.

The post defines Lending 2.0 as:

companies that are using their technology to:

1. Observe a previously unobservable data point to invent a new type of credit — where the yield is high not due to greater risk, but rather due to a lack of capital in the space

2. Build a barrier to entry that will allow their yields to stay high, despite an increase in competition

Observe a previously unobservable data point

Unlike traditional lenders, all of which have access to more or less the same data sets, Fintech companies are usually involved in financial transactions that are not publicly visible to other companies. These activities help Fintech companies build new data sets that can be tested as parameters in risk assessment.

Some of the financial activities that Fintechs provide are currently under-services by traditional financial services providers, which makes it a wide and lucrative new market.

Barrier to entry

The post observes three main ways to create these barriers:

1. Switching costs

2. Unique data set (as discussed earlier)

3. Ability to affect outcome

Many of these Fintechs are already an integrated part of their customer’s financial value chain. This means that the customer’s appetite to switch to competitors is usually low. So if their credit products are directly linked to their services, this means that the chances that the customers would switch to another credit provider, for the same use, is low as well.

As for the ability to affect outcomes, again the Fintechs have the upper hand over traditional lenders in more than one way:

The Fintechs constantly monitor their customer activity. This gives them a great opportunity to observe potential hardship and payment failure and proactively manage the risk. This is a huge advantage over traditional lenders.

Because the customers are depended on the Fintech’s services, their willingness to pay the credit they consume is much higher than a lender with which they have transactional relationship with.

At Backbone we aim to help Fintech companies become lenders using our “Credit as a Service” platform.