Cloud software early sign of fintech disruption

The report warned that the arrival of non-financial firms that move “horizontally” into financial services could “disintermediate” the traditional broker channel. It said that an early sign of this was SME businesses’ increasing rate of adoption of cloud-based software solutions.

The report explained: “Lenders form partnerships with non‐financial platforms . . . use their data and offer loans through their user interfaces [and then they] improve the sophistication of their underwriting, using their partners' data to make highly targeted offers that anticipate customer needs.”

According to Deloitte, the end result could be that the traditional broker channel is replaced by non-financial platforms which derive customer loyalty by “having customers locked in to their ecosystem”.

Additionally, as partnerships between banks and non-financial firms grow, traditional aggregators may be usurped by online platforms, allowing “for comparisons, thereby increasing price competition”.

Fintechs push lenders to provide smoother experience

In the lending space, that has meant that lenders have been pushed to meet the streamlined experience that the better fintechs excel in providing.

The report looked at online lender OnDeck’s fintech-bank partnership with JP Morgan. Designed to improve OnDeck’s loan origination to JP Morgan’s four million small-business customers, the partnership ultimately pushed OnDeck to “reorient” its strategy and to focus on delivering a “highly scalable OnDeck-as-a-Service model”.

Rob Galaski of Deloitte Canada, Americas FSI regional leader and co-author of the report said: “Fintechs now define the tempo and direction of innovation in financial services, but high customer switching costs and the rapid response of incumbents has challenged their ability to scale.

“Agile incumbents have used the fintech ecosystem as a supermarket for capabilities, making the ability to nurture and rapidly form partnerships a critical ingredient to banks’ competitive success.”

Divergent net promoter scores

The report also found that the average net promoter score was higher for marketplace lenders.

A net promoter score is a measure of a customer’s willingness to recommend a company’s product to another, with the lowest score being -100 and the highest 100.

Scores by lender type ranged from 80 for marketplace lenders to 5 for national banks, with credit unions at 60, community banks at 40 and regional banks at 20. Deloitte noted that marketplace lenders demonstrated “superior customer satisfaction”.

Looking ahead, Deloitte questioned the degree to which platform lending models will increase, the ability of incumbents to address their legacy system without “materially impeding” competitive ability, and the ways in which borrower preference for distribution channels will evolve.

Deloitte commented: “Fintechs have materially changed the basis of competition in financial services but have not yet materially changed the competitive landscape.”

Marketplace lending

In another finding, Deloitte noted that marketplace lenders are at a cost disadvantage as compared to traditional banks as a result of funding economics. The report revealed that “online lenders pay more to attract funds, especially in a normalized environment”, prompting questions about the sustainability of such models.

The report asked whether marketplace lenders can lower funding costs to be able to attract price-sensitive clients and questioned the ability of marketplace lenders to attract deposits should they become banks.

“A strategy of funding diversification and cost optimization is critical to marketplace lenders, but it blurs the line with traditional banking,” the report said.

[Related: Export finance empowering SMEs to ‘scale quickly’]