Fintech companies may be pressuring banks, but the innovators themselves may end up being the relief banks are looking for.
By offering very specialized services to customers, fintech companies are challenging banks to follow suit. Large financial institutions manage dozens of products and services, making it hard to compete with startups focused solely on a single niche. Banks have long focused on vertical integration, owning the value chain from end to end -- while startups favor specialization.
“To the extent that banks faced competition it was from another bank which also owned its entire vertical stack end to end, which was operating in the same geography," wrote Pascal Bouvier, venture partner at Santander InnoVentures, recently. "Oligarch banks ruled. Today’s bank is under threat at each layer of its stack instead, which makes for a much more complex competitive landscape."
The bank of the future may eventually become the center of the user interface, with fintech companies gathering around the banking watering hole. A good example of this type of arrangement is the agreement TransferWise made with German online bank Number26, giving clients of the bank access to its currency services. In this set up, banks provide the front end experience as well as access to resources supplied by third parties.
Spotcap and piggyback loans
One company trying to fit into the circle around banks is
Spotcap. Founded in 2014 by Toby Triebel and Jens Woloszczak, Spotcap provides lines of credit to SMBs in Spain, Australia, and the Netherlands. Incubated and backed by Rocket Internet, the Berlin-based online lender uses both technology and experience to determine an SMB's creditworthiness; Internally-developed algorithms and smart contracts combined with a human review board determine if a SMB qualifies for a credit line.
Spotcap has only been in the Netherlands for 15 months and is still small, only underwriting $50m in the first half of 2016. Although it’s a drop in the bucket of the regional lending market, Spotcap has grown 500% year over year and has less that a 1% default rate since it started lending in the Netherlands.
What makes Spotcap different from other online lenders is its approach to incumbent financial institutions. Currently, 25% of Spotcap’s loan book is in piggyback loans with banks -- where two or more lenders underwrite a loan together. For example, a SMB needs a $1 million loan, but a bank feels the maximum secured loan they can offer is $750k. The bank then contacts an unsecured lender like Spotcap, which evaluates if the SMB qualifies for the remaining $250k. If so, the bank packages the two separate loans, and the SMB pays both the bank and the unsecured lender. Banks win with piggybacked loans since they gain a new customer while staying in their lending comfort zone, and also make more money.
Banks and fintech currently collaborate on piggyback loans
On a recent trip to Holland, I met with Niels Turfboeur, Spotcap Managing Director of Benelux, which includes the Holland office. We discussed how Spotcap fits into the changing banking world, and how some would call online lending disruptive. Turfboeur disagreed, explaining that Spotcap is more of an innovator than a disruptor in banking. “Online lenders offer a slightly different product in a different way," he said. "Banks can offer the same product if they want to, but it’s very expensive for them. Its not like we have something they can’t have. They’re very smart people with a lot of money."
Becoming a preferred supplier to financial institutions is essential to Spotcap’s success, and Turfboeur spoke to the importance of developing working relationships with banks and institutional partners. He explained, "There will be new ways banks and fintech work together. There is a synergy between the two. It could be that they merge, or sign a contract saying we like each other, lets do tickets together.”
We ended up discussing how Spotcap fits into the new banking ecosystems -- how banks and fintech companies, like Spotcap, will collaborate, and how banks may become the entry point for customers while third parties provide enhanced services.
"As a product company, what’s our added value if we become a bank? There will be specialized fintech surrounding a bank in several degrees of integration, but the bank will be in the middle as the director," Turfboeur concluded.
Status quo for now
Unless the Armageddon or zombie apocalypse happens anytime soon, banks will likely remain the backbone of finance. Spotcap, and other innovators like it, have an opportunity to work closely with bank partners.
As banks start to move away from the vertical stack model, they may look to established relationships in determining who gets to be a part of the bank's product suite. If fintech companies play their cards right, they may eventually see themselves in a bank’s inner circle, reaping the financial rewards of such integration.
