Marketplace lenders need to adjust if they are to mature into lasting, profitable businesses, John Zepecki believes.
Mr. Zepecki is the group head of global lending product management and the Centre of Excellence at D+H, a leading financial technology provider to global financial institutions.
“They are beginning to get a reality check that running a profitable business is challenging,” Mr. Zepecki said when discussing maturing fintechs.
The financial services industry can learn from other sectors which grappled with whether or not to spend more money on building in-house technology or acquiring packaged software from an external source, Mr. Zepecki said.
“You get more technology in a package, more variety, but the financial sector was slower to do that.”
In most sectors the larger players have the money to spend on the mobile and digital experience, while smaller competitors can struggle, Mr. Zepecki said. This is true for fintechs, which are taking on established entities. That’s a tough act, but technology makes it easier by allowing new entrants to skip a few steps.
Where many fintechs struggle is in developing a long-term relationship with the customer, Mr. Zepecki explained. Some serve specific niches such as franchisees or equipment finance. Because the product has a narrow focus, they have to continually work on customer acquisition as repeat business rates are lower. Even the biggest fintechs are struggling to generate repeat business and have to turn to additional rounds to maintain capital flow.
Banks and other established institutions have a breadth of products that make it easier to foster an ongoing relationship with clients, Mr. Zepecki said. Student loans lead to automobile financing to a series of mortgages and maybe IRAs too. Fintechs for the most part do not have that though OnDeck is one company that is diversifying.
Talk to enough fintech entrepreneurs and most will say they are a technology company first, while a smaller number deem themselves financial companies. Some predict trouble for companies that cannot blend the two. If the financial side is great but the technology is ineffective, you won’t properly serve the customer. If the technology is great but you don’t understand finance and cannot adjust to market conditions you won’t last long either.
“Philosophically it depends on your DNA,” Mr. Zepecki suggested. “You identified how you are going to make money and set up your business and customer relationships in a certain way. Shifting your direction is difficult.”
Even larger companies intending a shift can struggle, he added.
Lending Club and OnDeck are having rough starts so far this year as their problems have followed them from 2016, Mr. Zepecki said. If repeat customers fail to keep coming back the high cost of acquisition, coupled with the riskiness of some loans, will make it challenging for them to achieve sufficient and lasting profitability.
“As volumes go down and there continues to be issues, the question is if there is a solid business at scale over time, and the jury’s still out,” Mr. Zepecki said.
Financial institutions are working to solve the friction problems alternative lenders have addressed, so if the upstarts do not have an effective long-term strategy their area of differentiation shrinks and they risk losing their spot in the marketplace.
“First they have to find a model that works,” Mr. Zepecki said. “Then it has to be repeatable and scalable. They have to be able to adapt and improve it.
“Speed and convenience mixed with a personal touch is what people want and that’s tricky.”
As a customer’s needs change, banks have the ability to pivot with each one by offering mortgages and commercial transactions, Mr. Zepecki said.
Many are predicting consolidation in marketplace lending, possibly as soon as later this year. Some smaller players will join forces, throw things together and hope their chances for success go up, Mr. Zepecki suggested. Others may unite if their boards think it makes sense. While this occurs, establishment institutions are well-positioned to solidify and grow their market positions.
“There is a big opportunity for financial institutions to serve their customers better,” Mr.Zepecki said.