Everyone is talking about fintechs, but I contend banks still have the upper hand when it comes to controlling the most attractive segment of the lending market. Fintechs that are leveraging new avenues of data to identify loan prospects and quickly approve loans are generally reaching loan prospects who wouldn’t qualify for traditional bank financing. Why else would a loan customer agree to pay twice the rate a traditional bank would charge? The trade-off for quick decision-making and processing that fintechs offer is usually a loan rate of 15 percent or higher. So I don’t see the fintechs disrupting the market for traditional credit.
But, I do see banks gaining the ability to lend to more companies, as better information mitigates certain risks. Think about Fiserv’s acquisition of First Data. With the kinds of products a Fiserv-plus-First Data can offer, banks may be able to comfortably lend to companies it previously would have considered unbankable.
First Data is a payment services business with more than 6 million merchant locations around the world. Fiserv sees an opportunity to match First Data’s data gathering capability with its 12,000 financial institution customers. If Fiserv can figure out a good way to marry its core processing capabilities with First Data’s payments information, a bank could make huge strides in lending to small- and medium-sized businesses. You can learn a lot about a company if you can track its daily sales transactions. Match that with any accounts payable information the business might be running through its bank account, and the bank has more than enough information to determine what kind of loan customer that company might make.
PayPal and eBay provide a compelling example. Thousands of people have set up businesses on eBay, selling an uncountable variety of goods. eBay bought PayPal in the early 2000s and has been the company’s main payments provider since 2003. They continue to work together even after the companies split in 2015.
PayPal can track the payment transactions recorded by its customers. It knows exactly how much money is flowing through these companies. With that data, it knows how much money any of those customers could borrow and markets credit to the best candidates. What company wouldn’t love to have payment information on a pool of potential customers reliable enough to lend on? The system works so well for PayPal that it doesn’t even bother to check the customer’s credit bureau record.