The fintech sector has gone through a number of manifestations in the past two decades. That’s reshaped how both consumers and companies perceive and engage with finance. Today, alternative lenders continue to promise both disruption and possibility for the financial sector overall. Yet traditional financial institutions can also expect to see their practices evolve. The establishment and newbies will continue to learn from each other.

 

Fintech has put out the “welcome” sign to small businesses needing financing

Today, fintech is a small but high-growth slice of the commercial “lending pie.” Newer entrants have focused on previously underserved sectors of the market – like the 20 million-plus small businesses in the US. As newer lenders have grown the overall pie, they have shown the potential for using new technologies and innovative approaches to address the under-served. Keen to compete, established players are also paying fresh attention to this market. As a result, small businesses have more opportunities to connect with the financing essential to growth. This is good not just for borrowers and lenders, but also for the economy overall.

How will innovation reshape due diligence?

Whether innovation happens at a start up or within an established financial company, it raises compelling questions that will shape the market of the future. One of the most fascinating is: How will risk management and due diligence evolve as the lending pool continues to expand? We can be sure that one fundamental fact will not change: Establishing the credit worthiness of a borrower is key to any lender, whether an established firm or a disruptor. So, it’s fascinating to consider how this need will be met in tomorrow’s financial marketplace.

New ways to assess credit-worthiness

While a business’ credit score is paramount to whether it will qualify for a loan today, there may be other ways to assess the viability of a business and its likelihood to repay a debt. Consider: a small family business such as a deli or dry cleaner might have a less than stellar credit score, yet they may have been a vital part of the community for decades. And, they may be likely to remain so for decades to come, as a new generation takes over. What’s more, where credit scores track only past performance, there are new and innovative ways to get a read on likely future performance under younger management. For instance, a survey of client postings to Yelp and other online review platforms may reveal a surge in customer acquisition and enthusiasm. That can be the sign of a strengthening book with greater appeal to lenders – strength that might be overlooked by more traditional due diligence.

The “tried and true” still matters

By the same token, newer entrants are likely to find themselves adopting more of the methods long practiced by traditional lenders. The borrowers that fintech serves do tend to default at higher rates. So, it will become ever more important for alternate lenders to protect their interests as their portfolios grow. That will involve traditional approaches to collateralizing loans. Over decades, mainstream lenders have largely perfected the art and science of collateral management – providing valuable understandings that newer firms would do well to adopt. As these players move into the mainstream, they may also find that regulation, reputation, and their own credit worthiness demand that they adopt the very thorough, precise background reviews common at larger and more established institutions.

Change plus continuity

Along with opportunity, the financial world of the future will surely bring new questions. At the same time, old questions will still matter – such as how to assess and protect against the risks associated with a given borrower. The answers are likely to combine change and continuity. Innovation will lead to new practices, even while newer entrants adopt the proven approaches of more established companies.