There’s rapid-fire change in the lending industry with new competitors emerging on a daily basis. Some of this competition comes from unexpected directions like e-commerce platforms, rideshare apps, and Wall Street giants who used to specialize in commercial loans for large corporations.
Lenders aren’t the only financial group seeing old lines blurred by new technologies. Investment banks are watching closely as Spotify Issues an Unorthodox IPO. The music and video streaming service just initiated a direct listing on the NYSE, without the benefit of an investment bank to underwrite the shares. This maverick move is causing industry analysts to question whether some Wall Street services may be overrated and overpriced in an era where disintermediation is becoming more prevalent.
Changing Competitive Landscape
For many years small to mid-size lenders could count on limited competition from two distinct categories. Traditional lenders with slow, manual review processes who declined more than half their applications. And digital lenders with mobile-only platforms who attracted large numbers of Millennials. Quite often these digital lenders were using alternative credit scoring methods to approve the same prospect the traditional lender had just declined.
Now Wall Street behemoth Goldman Sachs Wants To Be Your Local Bank. They’ve launched a digital lending platform called Marcus, and they’re acquiring fintech start-ups to accelerate the development process. This new venture is a total about-face for Goldman Sachs because Marcus was designed to attract Millennials looking for savings accounts and small dollar loans. In fact, new customers can open an account with a single $1.
Marcus was launched late last year before the US tax reforms. This year many American businesses are looking forward to substantial tax savings. It will be interesting to see how many traditional lenders invest their found monies in digital platforms, like Marcus, in order to compete more effectively with fintech enterprises.
The Money’s in the List
A more troubling form of competition comes from non-bank, e-commerce corporations like Amazon, Rakuten Ichiba, and Alibaba. As well as Grab, the rideshare giant of Southeast Asia who recently acquired Uber’s Southeast Asia network.
These companies are rewriting the rules of customer relationship optimization. They mine a wealth of proprietary customer data to assess their clients’ financial needs. And then convert this behavioral analysis into a surrogate credit indicator that replaces traditional credit bureau scores. It’s the ultimate form of targeted upsell and cross-sell.
Amazon may be best known as a consumer e-commerce marketplace, but behind the scenes, it’s a large technology platform that supports more than 2 million independent merchants. According to TechCrunch, “third-party sellers…account for over 40% of the total units sold on Amazon.”
Amazon tracks merchant performance indicators like length of time in business, sales volume, growth curve, and business banking information. Then their proprietary algorithm identifies storefronts who could potentially grow faster with a working capital loan for inventory or software.
Amazon Lending has already issued several billion dollars in commercial loans via a private invitation to high potential businesses. According to NerdWallet, “Amazon offers its merchants loans from $1,000 to $750,000…and interest rates are comparable to credit cards.” And PYMNTS.com reports, “Amazon is partnering with Bank of America Merrill Lynch to expand its lending program for small businesses.” They go on to say, “The partnership will allow the e-commerce giant to reduce its risk and provide credit to more merchants.”
What’s next? According to the Wall Street Journal Amazon is talking to big banks, including JP Morgan Chase, “…about building a checking-account-like product…that would appeal to younger customers and those without bank accounts.” Industry analysts point out this partnership approach could mean their goal is to provide complimentary business services, not to disrupt the consumer retail banking category.
Amazon better up their game if they want to catch Asian e-commerce platforms like Rakuten Ichiba and Alibaba because both groups already run successful banking operations.
Rakuten Ichiba is Japan’s largest consumer e-commerce platform, making it one of the largest online markets in the world. They launched Rakuten Bank under the name eBank almost two decades ago. Their first products were Internet banking and digital payments options for buyers and sellers on their platform. Today Rakuten Bank runs Japan’s premiere Internet bank along with a full suite of personal and commercial products: savings accounts, loans, securities investments, and credit cards. In fact, they’re the third largest card issuer in Japan.
The Rakuten Institute of Technology just opened a fifth location in San Mateo, California. The Silicon Valley center joins a growing family of think tanks in Tokyo, Paris, Boston, and Singapore. Their mission is to combine creativity and innovation with emerging technologies to fuel the growth of e-commerce, including support components like payments systems and working capital loans.
Alibaba is the world’s largest digital wholesale marketplace, connecting 10 million active suppliers with small to mid-size retailers across 240 countries and regions. This is similar to the Amazon business model where sellers create a digital storefront, and then the platform collects performance data for upselling, cross-sell opportunities. The difference is scale. Alibaba has five times the number of active merchants, compared to Amazon. And they’re way out in front on the financial services curve. Their loan programs will likely compete head-to-head with American commercial lenders over the next 5 years. One of their goals is to add 1 million US businesses to their client base and then cross-sell financial products.
Ant Financial Services Group, the original Alipay platform, was spun off from Alibaba in 2014. Today it operates a variety of financial products and services like Alipay, the world’s largest online payments platform. Yu’e Bao, the world’s largest money market fund. And Sesame Credit, a credit scoring system fueled by social media signals and online purchasing behaviors.
According to The Economist, “Ant Financial is already the world’s most valuable fintech firm worth $60 billion dollars…with 632 million customers worldwide.”
Ant Financial just unveiled a facial recognition payment technology. They’re installing Alipay in millions of American retail outlets. And they’re in the process of buying MoneyGram, an American money transfer company serving more than 200 countries.
Grab, the Singapore based rideshare platform is known as the Uber of Southeast Asia.
Rideshare enterprises rely on an army of drivers who use their personal vehicles to transport rideshare clients. It’s another example of a company who collects substantial information on their merchants and customers and then mines the data for upselling and cross-selling opportunities.
Their drivers are small, independent business people. They’re the perfect target for a commercial vehicle loan. A business equipment loan to buy software, smartphones, and laptops. Or an auto insurance policy. Riders are predominantly younger participants who are comfortable sourcing a ride from a stranger and paying with their smartphone. They’re the perfect target for a mobile payment app or a small personal loan.
Grab entered the financial services arena late last year with GrabPay, a digital payments platform for merchants and a digital wallet for riders. Five short months later they announced the launch of Grab Financial Services Asia, a new venture offering loans and insurance products to small businesses and micro-entrepreneurs.
Grab already has plans to offer a credit scoring service to banks in Southeast Asia. The majority of this consumer population has no credit history, so risk assessment and credit decisions are a challenge. Grab’s proprietary credit scorecard, based on user data points, has a strong track record so far. The default rate is a low 1.5% across a portfolio of $750 million in loans.
Focus on the Fundamentals to Compete More Effectively
At Turnkey Lender we’re a big fan of the fundamentals. It’s a bit like the discipline of martial arts where you concentrate power in the core and react to any competitive threat from a position of strength. No one has a crystal ball. Not one of us can accurately predict the twists-and-turns of the financial marketplace over the next few years, let alone the next few decades. However, the tactical twists-and-turns become irrelevant when your lending program is based on a customer-centric business model, that’s strategically designed to attract and retain a clearly defined primary prospect audience.
Start by asking the right questions. Who is your primary prospect? What’s the ideal value proposition? What’s the best way to attract and retain them as long-term customers? How do you convert them to brand advocates who promote your products on social media? What’s the best omnichannel communications and delivery system?
Your answers will deliver a customer-centric lending program that’s well positioned to neutralize competitive threats no matter what form they may take. In our experience, the top performing lending programs differentiate their brand with a user experience that’s fast, easy and personal. They provide a digital-only experience, plus the option to connect with a live customer care specialist.
Combine Customer Insight with Personal Trust
We believe the most dangerous, long-term competition will come from non-bank companies who understand how to engender a long-term relationship. And then target, qualify, and credit cross-selling opportunities using their own in-house customer data. This potentially lethal threat comes from a powerful combination of customer insight + personal trust.
Lenders who thrive will learn to model this approach in their own business niche. And they’ll stay focused on long-term growth, by leveraging optimization tools like outsourced expertise, specialized software, and cloud-based technology platforms that maximize their time and energy.