The future of lending: how technology continues to shape the finance industry
New technology and increased competition between traditional banks and fintechs continue to define the financial landscape in the UK. The explosion of new market entrants is having a huge knock-on effect for the lending industry. Figures show promising results for tech investment across Europe in 2019, with significant growth in fintech – one of the fastest growing tech industries, according to a new report by Atomico.
The rise of fintech
The UK has established a strong lead in innovative financial products that account for 50% of capital investment in European fintech in 2018-19. Fintech lending platforms have become increasingly popular with consumers because they are able to provide better financial options for customers who feel they have been underserved, and often overcharged, by traditional banks.
However, the competition between the financial players is becoming more nuanced since the services that fintechs provide have matured, and instead, they have begun to work with the banks to develop products they, or their customers, find useful.
Fintechs, have been given a stronger foothold still, because they don’t have the legacy of bulky infrastructure, which means they can be more efficient, and often, they have the most up-to-date technologies to gather customer and market insights quickly. This also allows them to successfully break through the traditional finance market because they understand what their customers value, and care less about, and have the dexterity to deliver new features quickly within an engaging UX.
Banks are increasingly looking to copy the formulas used by the fintechs – but as adjacencies to their core business, such as Bo, RBS’s challenger bank brand – rather than reform their legacy brand propositions. As a result, it has – and will continue to – become commonplace for new and established financial players to form strategic partnerships.
New technologies helping banks to become more customer-centric
The future of lending will continue to be defined by the development of technology within the sector and the way it is applied by the fintech industry – the success of which, up to now, is largely owed to its specific targeting of newer groups of consumers who prefer to do things virtually.
Open banking and PSD2 standards have also led to the creation of new technologies that allow third parties to safely and securely access customers’ current account data at their request. This means there’s a big opportunity for more fintechs to plug into traditional banks and build new services that are useful for customers. Put into practice, it also allows adopters to present their customers with the best tailored offers available to them. Some banks are also developing solutions to target thin-file customers, using technology that helps to monitor various alternative sources of information on creditworthiness, for example, paying rent and utilities on time.
AI and machine learning will continue to play a major role in the future of lending decisions. Both have emerged in the personal finance market in recent years and are driving change in the way that the sector operates. From a business perspective, both present numerous opportunities for brokers to become much more customer-centric, significantly enhancing the customer lending experience by combining the speed and precision of technology with the human touch. This creates solutions that are much more tailored to the customer’s needs based on learnings from large data sets.
Extending lending options to perennially underserved groups
These technologies will also continue to benefit consumers who have struggled in the past to establish credit, either because they don’t have recent credit, or may not have credit at all. Using machine learning it is now possible to target these consumers, conducting risk assessments that accurately predict credit scores which will allow underserved groups to present themselves with credit profiles in the future.
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Looking to the future
The industry is undergoing rapid change and it’s exciting to see the radical innovation that fintech is bringing to the table.
There is a certain degree of hype around AI and machine learning technologies and, of course, there are risks involved with adopting them prematurely and without a proper measurement of results. It is also important to bear in mind, that while these technologies bring about this next phase in the evolution of financial services – and indeed, the future of lending – the importance of human touch should not be overlooked.
The modern finance market is crowded with options and choice, and customers often lack sufficient support and guidance. At Freedom Finance we strive to offer our customers clarity, not just endless choice. As systems will undoubtedly become more self-managing, employing the right blend of technology and human support to make these important decisions easier and clearer will be vital.
About Brian Brodie
Brian Brodie is Group Chief Executive at Freedom Finance with 37 years of experience in the personal finance industry.
Brian was appointed CEO at Freedom Finance, after a long-standing career with a number of well know financial institutions including, Halifax, Royal Bank of Scotland and Virgin Money.
He was brought on board to develop the loan broker into a more diverse and digitally focused platform, in an attempt to catch the next phase of digital evolution. During his time at the business, his team have secured various notable partnerships to provide services for household brands including AA, Asda Money, Admiral and Purplebricks.
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Stripe backs Step - the digital bank for teens
The Series C round raised US$100m in capital from a number of backers, including Coatue, TikTok star Charli D’Amelio, actor Jared Leto, and Will Smith’s Dreamers VC, for the enterprise.
Step provides a free FDIC-insured bank account and Visa card to teenagers. The accounts are backed by Evolve Bank and there is no subscription charge for its usage. Users don’t pay for their accounts and there are also no overdraft fees.
The mobile banking app enables parents to set controls and limits on spending and encourage responsible finances. According to data released by the company, 88% of the platform’s users say this is their first bank account.
To date, Step has seen great success in the marketplace. The company has raised more than $175m from investors and now has 1.5m users.
Stripe, which was founded by Irish brothers Patrick and John Collison, previously led Step’s $22.5m Series A round in 2019.
Step's Series B funding round also brought in $50m, and has a distinctly celeb-tinged reputation with investors including Justin Timberlake and the pop duo The Chainsmokers.
Users get access to a free, FDIC-backed bank account, a spending card and P2P payments platform to send and receive money instantly.
CJ MacDonald, chief executive of Step, said the company is aiming to improve the financial futures of the next generation. “Step is the only banking platform that enables teens to start building a positive credit history before they turn 18 and does not charge fees of any kind.
He has previously spoken about the importance of financial literacy for young people. “Money is just one of those things where I think the more educated and equipped you are early, the better decisions you can make down the road,” he told . “And you can also prevent yourself from making costly mistakes. I mean, the average American doesn't have $400 in emergency savings and pays $350 a year in banking fees. If we can help this next generation just ultimately be smarter and more educated as it pertains to money, I think we'll all be better off.”
Kyle Doherty, managing director at General Catalyst and Step board member, explained, “Gen Z is flocking to modern financial solutions that can be easily embedded within their digital lives and Step has a unique model for how to do this right.”
The news follows on from Stripe’s recent announcement that it plans to acquire TaxJar. The fintech, which builds software for online businesses that automates the reporting and filing of sales taxes, will most likely be integrated with Stripe’s billing services.
Currently, No terms have been disclosed but the Boston start-up had raised more than $60m from investors including Insight Partners.
Stripe chief financial officer Dhivya Suryadevara said of the move, “With TaxJar, we will help millions of internet businesses running on Stripe with their sales tax and make it easier for them to sell internationally.”