Analysis Featured

Bank’s response to FinTech Innovation

Banks are responding to FinTech Innovation in many different ways. In most cases banks seem to learn, adapt, buy, partner and profit from the latest innovations brought to the market by the large FinTech investments since 2011.

Here is a little bit of data showing this. Our sources are Bloomberg, Tradestreaming, and The Financial Brand.

Big Banks Turn Silicon Valley Competition Into Profit

It’s not that the upstarts — often called fintech — are failing to gain traction. Internet ventures pitching loans to cash-strapped consumers, small businesses and home buyers, for instance, have posted spectacular growth in recent years. It’s just that banks have a huge lead in lending and are watching the startups closely. As borrowers embrace new services, traditional firms are riding along.

online lending consumer vs business

Here are five examples:

LendingClub’s Backers

In May, LendingClub broke out its sales to banks: Community banks and other old fashioned lenders snapped up about 34 percent of the $2.8 billion of loans it arranged in the first quarter, up from an average of about 25 percent during 2015.

lending club sales % to banks

Some of LendingClub’s biggest loan buyers have bolstered their war chests or operations with financing from banks. Colchis Income Advisors entered into a credit agreement with Bawag PSK of Austria, according to regulatory filings. Arcadia Funds arranged for two of its Cirrix partnerships to borrow from Silicon Valley Bank. And MW Eaglewood lined up financing for its main LendingClub fund from Capital One Financial Corp. in 2012. Spokesmen for the funds and banks declined to comment or didn’t respond to messages.

Chasing Entrepreneurs

Small businesses can thank internet ventures for simplifying loan applications, speeding decisions and providing much-needed credit when many traditional banks were pulling back in the wake of 2008’s financial crisis. Nonbanks now provide about one-quarter of the $800 billion in loans outstanding to the sector, according to research by QED Investors and Oliver Wyman. But the interest rates aren’t always low.

For a time, banks were content backing the loans. Goldman Sachs was among firms that entrusted more than $300 million years ago to fund lending by On Deck Capital Inc., one of the largest providers of small business loans over the internet.

Now, established lenders are taking a more active role. JPMorgan announced a deal in December, letting it access On Deck’s proprietary credit-scoring system to quickly evaluate applicants before using its own balance sheet to make loans. On Deck, in turn, gets a foothold in the burgeoning “fintech as a service” market. But the arrangement has done little to stop a 49 percent slide in the company’s stock this year.

More recently, established lenders have announced their own online lending portals for entrepreneurs.

wells fargo lending

Wells Fargo & Co. said in May that its new “fast decision” platform will help it reach a goal of providing $100 billion in new loans to small businesses by 2019. AmEx, which already provides more than $200 billion of funding to entrepreneurs for business purchases on their credit cards, expects a new online-loan portal will let it handle even more of their spending.

Mortgage Apps

Fintech ventures starred in Super Bowl ads this year, with Quicken Loans toutingRocket Mortgage, a platform letting users apply for home loans on smartphones.

non bank migration of FHA loans

The tidal wave is benefiting banks, too. Behind the scenes, many of the upstarts get support from traditional banks. Detroit-based Quicken, for example, raised $1.25 billion for itself and its parent company last year in a bond sale underwritten by JPMorgan and Credit Suisse Group AG. It also used lines of credit from banks to help close $80 billion in home loans that year.

[Comment: 4th was Blockchain, not very relevant to our readers here]

Robo-Advisers

robo advisers

Top Wall Street firms, seeking stable fee income, are now developing their own robotic arms. Bank of America Corp. will unveil an automated investment prototype this year after assigning dozens of employees to the project in November, people familiar with the matter told Bloomberg at the time. Morgan Stanley and Wells Fargo also have said they would build or buy a robo-adviser.

How Banks use Machine Learning for analytical advantage which lead to a large increase in profits

“The future is already here — it’s just not very evenly distributed.” Banks are increasingly using machine learning to power part of their operations, but the adoption of these new technologies is not uniform.

Top data scientists are employed by financial institutions and working with programming tools like SPCC and R, they filter and analyze huge data sets in order to perform analytical tasks. “No human being can wrap his head around that amount of data,” said Daniel Druker, CMO of Ayasdi, a machine learning company that partners with financial institutions, like Citi and Credit Suisse. Instead, using machine learning algorithms, a computer can surface insights and recommendations from those data sets, while the quants examine and take actions based on those learnings.

According to McKinsey’s 2015 Global Banking Report, banks that have replaced older statistical-modeling approaches to credit risk with machine learning techniques have experienced up to 20 percent increases in cash collections from outstanding loans.

Out of over 20 banks that work with Ayasdi, Drucker said, 100% are either already operating in this stage or actively exploring implementing such technology.

The highest level of machine learning application is the fully automating business processes. Take a life insurer, for example. When a customer applies for a policy, he might be asked to fill out a 40-page long form and get a physical examination. That information is then sent back to the company for approval. The entire process can take over a month to complete.

According to McKinsey, some European banks using these techniques report 10 percent increases in sales of new products, 20 percent savings in capital expenditures, and 20 percent declines in customer churn.

ip soft screen shot

CB Insights has identified 41 companies providing machine learning solutions in the financial industry. Together with the explosion of general applications of  AI, deals and investments in AI companies reached record levels in 2016. Since the beginning of 2016, over 15 fintech AI companies have closed investment rounds.

AI-fintech

How Digital Investment are changing the face of Banking

Investment in digital banking is driving increased customer acquisition, cross-selling and satisfaction while decreasing branch traffic and related costs.

Big_banks_take_the_lead_in_satisfaction_for_the_first_time-565x366

This is confirmed by the J.D. Power research that showed that there is an immediate lift in overall satisfaction when customers use mobile banking (+27 points on a 1,000-point scale), and this impact increases even more when banks provide their mobile banking customers with a highly satisfying experience (+82). According to J.D. Power, “The outlook for Big Banks remains positive, driven by their (big banks) ability to invest in customer-centric innovations (e.g., digital channels, analytics, and branch transformation), as well as their success in growing customer segments.”

Mobile_banking_has_a_positive_impact_on_satisfaction-565x275

Recent disclosures of mobile banking use by the big banks provides a glimpse of the impact of digital investment on mobile use. Of the three largest U.S. banks, JPMorgan Chase leads the way with nearly 25 million active mobile customers as of the second quarter. That was up 18% compared with the same period last year. Bank of America had the second most active mobile users, with 20.2 million monthly active app users, with Wells Fargo reporting 18 million active users.

Mobile_banking_users_at_large_us_banks-565x308

Bank_of_america_active_mobile_users-_and_mobile_deposit_volume-565x469

Bank_of_america_channel_use_2Q16-565x361

Bank_of_america-_digital_appointments-565x302Greater_mobile_banking_functionality_improves_satisfaction-565x334

 

Please note: We have just compiled information we found extremely interesting, with a lot of data, from different sources in this post. This post is not original content created by Lending Times.

About the author

George Popescu

Serial entrepreneur.

I sold and exited my most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. I was the Founder and CEO which I boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 I was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, I founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. I advised 30+ early stage start-ups in different fields. I was also a mentor at MIT’s Venture Mentoring Services and Techstart Fintech in NY.

• Previously I obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously I worked as a visiting scientist at MIT in Bio-engineering for 2 years. I had 3 undergrad majors: Maths, Physics and Chemistry. My scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• I am originally from Romania and grew up in Paris, France.

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