Credit set to be the next area for disruption
Credit – the single biggest revenue driver among financial institutions – is set to be the next area where financial institutions will be disrupted. Innovation is very likely in this area and it will affect banks, said Udayan Goyal, co-founder and co-managing partner of Apis Partners, a private equity asset manager.
Hosting Innotribe’s Future of Money: a burning platform? session yesterday, Goyal said: “I believe the future of this industry is around ‘co-opetition’.”
The audience heard from people whom Goyal said were “disrupting how credit is thought about, how it is secured, how it is distributed”. Speakers included representatives from technology startups in the lending space, Kreditech, Iwoca, Cignifi and Mode. They discussed how they are using data and behavioural analytics to create new lending business models.
In total, 14 panelists, representing innovators from financial technology start-ups and innovators working in financial institutions spoke during the session. The effort of the session was to bring the two sides together.
For example, Kreditech enters emerging markets that do not have credit bureaux and will lend a certain amount indiscriminately. From the data that comes back from those loans, it will create its own credit curve. Cignifi also uses data that is not used by traditional financial institutions when they lend. For example, it uses data on how mobile users use their phones, who they call, how often and when, to assess their creditworthiness.
Gottfried Leibbrandt, chief executive of Swift (pictured), commented that he was on the panel at the front of the room to be the sceptic of the group, and that as a banker he learned “it is not about making the loan, but getting back the money”. Also, he noted that the challenge for banks is what they are allowed to do with the data that could be used to build a credit profile of their customers. “Startups have fewer constraints around that,” said Leibbrandt.
Steve Ellis, executive vice-president, group head innovation group at Wells Fargo, had a word of warning for the financial technology challengers: “The smartest people in the world do not work for your company. They are somewhere else,” he said, adding that they need to look outside their company in order to innovate.
After the bankers had finished saying their piece about the challenges that they have, Alexander Graubner-Mueller, founder and chief technology officer of Kreditech, said the bankers “talk about innovation but I have not heard anything innovative”.
Christophe Rieche, chief executive and co-founder of Iwoca, noted that banks have two structural advantages over new entrants. The first is that bank deposits are state guaranteed. The second is their large customer base, which has grown as a result of their long history. “The first is going to stay, but the second is at risk,” said Rieche.