Who's Afraid of Fintech?

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Technology is advancing rapidly on many fronts and finance is no exception. Financial Technology (or Fintech) harnesses innovation to expand the parameters of traditional banking and lending. That means convenient new ways to transfer money and new ways to access capital digitally. But there are dangers on this new frontier.

As fintech startups grab more market share, some players have exploited the lack of focused oversight in this new space by making risky and even unethical moves in their haste to grow. That has many fearful that a big debacle or data breach could destabilize the entire lending industry. And if that happens, regulators are expected to respond with sweeping regulations that could impede lenders (like us) whose practices and principles differ dramatically.

Don’t get us wrong; we fully embrace technology. But the fundamentals of truthful lending practices always come first. That’s something fintech must remember as it rapidly grows.

A 2016 CNBC report discussing where fintech is heading next noted investment in private fintech grew from $1.8 billion in 2010 to $19 billion in 2015, according to Citigroup. CNBC’s analysts expect Fintech to grow most in these four areas:

  1. Mobile Money – Such as money transfer, mobile banking, and payment processing
  2. Consumer Lending – Like Lending Club, Prosper, and SoFi
  3. Small-Business Lending – Like Kabbage and OnDeck
  4. Personal Finance Management – including robo-advisors such as Betterment and Wealthfront

In all these areas, the potential market is huge, CNBC points out. But so is the potential for a disaster like a high-profile data breach or fraud. If and when that happens, CNBC says, “You can be sure that regulatory scrutiny, which has been remarkably modest, will increase.”

As a cautionary tale, CNBC points to the recent case of LendingClub, a peer-to-peer lender touted as the vanguard of the new lending movement. Their CEO was forced to resign abruptly last year because the company sold an investor $22 million in loans that included a number of suspicious loan application discrepancies. Separately, LendingClub’s CEO also failed to properly disclose a 3rd party investment. After announcing these issues, when LendingClub needed someone to buy the debt of its customers, buyers were nowhere to be found and their stock dropped roughly 50% in about a week.

NPR’s All Tech Considered reported, With Lending Club Disgraced, An Industry Looks For Lessons. “As one of the first companies to directly connect borrowers and investors online, the Lending Club scandal started with a very big no-no: Employees of Lending Club went into the company database and doctored loan applications to make them look more appealing to investors,” explained NPR. Their takeaway: Oversight Is Essential.

While focused oversight is indeed crucial, some in the growth capital community worry that future meltdowns brought on by unscrupulous fintech practices could cause legislators and regulators to respond with broad and sweeping actions.We continue to hear industry chatter over concerns that federal rule making meant to limit so-called “shadow banking” (loosely aimed at merchant cash advance and online lending) could result in ill-fitting rules that harmfully limit good players in our industry. Timely and focused oversight for Fintech is the smart regulatory move.

Along with oversight, Fintech must take ownership of its role in the lending process. For example, Lending Club makes money by being a middleman — pairing investors and borrowers. If Lending Club had its own money involved, as opposed to being a platform for other people’s money, it would be a lot more rigorous at ensuring its processes were sound. “Without those stakes, the NPR report explained, “it’s easier for a company to justify bending rules to hit ambitious targets.”

And therein lies the main different between Fintech players like online lenders and companies like Fundamental:

We’re the principal lenders, not middlemen, and we create a direct relationship with our customers based on mutual trust. We operate within an established legal framework and we’ve got our own skin in the game. In the end, we grow our business by personally building the relationships that turn entrepreneurial ambitions into thriving companies.  

Without a doubt, Fintech is streamlining the many ways we exchange funds and obtain financing, and we look forward to reaping those benefits. But there is still no way to automate integrity. At Fundamental, our experience, insights, and relaiability give our clients the advantage. How can we bring certainty to the funding challenges you or your clients face?