Neo-Lenders are forcing change

October 1, 2022

Neo-Lenders are forcing change

Introduction

The world of financial services is changing fast, and traditional banks and lenders are facing new competition from a variety of companies looking to take advantage of their non-financial strengths to diversify into lending. The continued rise of neo-lenders, or fintechs who are innovating by creating new products outside of the traditional bank infrastructure, is likely to be a key focus for many industry executives in 2023. While consumer lending remains the primary way for fintechs to compete with banks, the corporate sector may be next for these innovative companies.

The world of financial services is changing fast, and traditional banks and lenders are facing new competition from a variety of companies looking to take advantage of their non-financial strengths to diversify into lending.

Innovating outside of the traditional infrastructure: Fintechs have been rapidly growing over the past few years because they represent some sort of disruptive innovation or technology that allows them to compete with incumbent firms (e.g., Uber, Airbnb). In fact, most fintech firms come from outside traditional banking circles and do not use traditional bank infrastructure at all.
Competing with banks in consumer lending: Many fintech companies are entering into this space because many consumers prefer dealing directly with each other rather than through their bank accounts when paying bills or making purchases online (e.g., PayPal).

The continued rise of neo-lenders, or fintechs who are innovating by creating new products outside of the traditional bank infrastructure, is likely to be a key focus for many industry executives in 2023.

The continued rise of neo-lenders, or fintechs who are innovating by creating new products outside of the traditional bank infrastructure, is likely to be a key focus for many industry executives in 2023.

Traditional banks are facing new competition from a variety of companies looking to take advantage of their non-financial strengths to diversify into lending. This includes insurers (e.g., Allianz, Genworth Financial), asset managers (e.g., BlackRock), tech companies (e.g., Google) and retailers (e.g., Walmart). These companies have been investing heavily in online lending platforms, which challenge traditional financial institutions’ dominance in lending via digital channels.

While consumer lending remains the primary way for fintechs to compete with banks, the corporate sector may be next for these innovative companies.

Corporate lending is different from consumer lending in several ways, including needs and goals. For example, many companies want long-term loans at fixed rates so that they can plan for their future investments or acquisitions. In contrast, consumers are more focused on short-term cash flow issues and personal debt repayment plans that help them get out of debt quicker. While fintechs have been successful in meeting consumer needs thus far, the market potential could grow even greater if they were able to offer customized solutions for business clients as well.

The growth in the neo-lender market is due in large part to consumer demand for digital solutions that offer flexible credit options.

The growth in the neo-lender market is due in large part to consumer demand for digital solutions that offer flexible credit options. In an economy that has become increasingly mobile, consumers value the ability to access loans and credit when they need it, make payments on their terms, manage their finances online, and get a loan without having to go through a bank.

Financial institutions must get serious about modernizing their processes, technology and operations if they want to remain competitive against neo-lenders.

Banks and credit unions are in a prime position to modernize their processes and technology, but only if they want to remain competitive against neo-lenders. Banks that don’t adapt will get left behind. Here’s how:

Banks must keep up with consumer demand

Consumers have come to expect online and mobile banking access, as well as real-time services like P2P payments, eCommerce and instant access to their money at any time or place. The best way for banks to meet these expectations is by automating the most tedious parts of their business using AI algorithms that are capable of learning over time as more data points become available — which allows them to operate faster while also improving accuracy rates across the board (from loan underwriting through risk management).

Banks need stay competitive against new entrants into the marketplace

Neo lenders typically use a combination of machine learning software coupled with artificial intelligence algorithms in order to offer faster service at lower prices than incumbent banks do — all while delivering better customer experience because they don’t have legacy infrastructure issues holding them back from adapting quickly enough when necessary (see point number 1 above). In fact, several studies suggest that 80% of millennials would rather go straight into debt than wait two weeks for approval when applying for a loan on an existing platform such as PayPal or Square Cash.”

While traditional lenders have legacy IT infrastructures that make it difficult for them to adapt quickly, fintechs have the advantage of being able to easily change course and respond to changing demands.

While traditional lenders have legacy IT infrastructures that make it difficult for them to adapt quickly, fintechs have the advantage of being able to easily change course and respond to changing demands. Fintechs are agile and nimble when it comes to implementing new ideas. They can quickly change their business model if something isn’t working as expected or if a new opportunity arises. Banks on the other hand take much longer to change their business models because of outdated technology systems that don’t support agile thinking.

In order to retain their customers and grow, banks need to keep up with evolving consumer demands around financial services.

In order to retain their customers and grow, banks need to keep up with evolving consumer demands around financial services. Traditional banking institutions are already lagging behind in many areas, including:

Being able to adapt quickly
Changing course when necessary
Responding to changing demands

Conclusion

While traditional banks have remained competitive by improving customer service and offering new products, neo-lenders are attracting customers by providing more flexible solutions that appeal to today’s digitally-savvy consumers. As the financial services industry continues to evolve, neo-lenders will play an increasingly important role in shaping how people manage their money.