The emergence and proliferation of FinTech platforms has been a wake-up call for the industry that has been trialing a range of responses, from those downplaying the threat to others looking to grasp the opportunity to transform into an innovative customer-centric lender.
Analysing these responses, traditional banks have been activating four market entry models to participate in the online lending sector.
The differences and degrees of commitment required for each option provides strategic choices to either ‘taste’ or ‘deep dive’ into the sector, as well as running dual strategies when, for example, diverse geographic markets are under consideration but resource constraints force different levels of participation.
Over the course of my next four FinTech Minute editions, we will conduct a detailed review of each market entry model, profiling the pros and cons of each, as well as providing examples of in-market execution.
For this edition, we will provide an overview of the four models and set up the discussion for subsequent editions.
The four market entry models that we have seen can be grouped into two broader categories, being Collaboration models, and a Direct Competition model.
As suggested by the title, Collaboration models are based on traditional banks forming strategic partnerships with FinTech platforms to share resources and capabilities that enhance a platform’s value proposition, thereby increasing all partners chances of success.
Three collaboration models are available to traditional banks, each having its own advantages, disadvantages and ideal market context application. Briefly, these models are:
- Contributing equity as a cornerstone investor – taking an equity stake in a platform by providing capital to be invested in capability building and operating activities;
- Collaborating as a strategic lender – participating on the lender’s side of the market by providing funding under preferred arrangements to support demand from borrowers;
- Forming a “white label” partnership – leveraging the technical capabilities of a platform, either in whole or in part, to offer a lending solutions to customers.
Direct competition model
The direct competition model is also self-explanatory; traditional banks enter the market by developing and launching their own platform in direct competition with non-traditional platforms on the fundamental principle they can shape their collective experiences and capabilities into a superior offering.
Under this model, traditional banks tend to compete on experience, however, they need to overcome the constraint of building off legacy IT systems and learn to exploit the growing open API and cloud based service ecosystems.
Winners and losers
All four models are currently being explored by traditional banks with each week bringing news of another example introduced into the market. These developments are setting up a very interesting competitive environment where winners and losers will emerge amongst the platforms, but only winners on the customer side as lending becomes cheaper, faster, simpler and more transparent.
Joining the conversation
Readers are invited to join the conversation by contributing thoughts, experiences and examples through the comments feature and to follow this series of postings as we investigate each of the market entry models over the coming weeks. To keep the conversation moving, I will share upcoming postings with anyone who likes this posting and encourage all readers to get involved.
Grow Advisors, Asia Pacific
The Grow Advisors Fintech Minute brings you everyday, relevant news on the evolving alternative finance, marketplace finance and fintech sectors around the world.
Contact a consultant to learn more on how we can accelerate your plans.
Grow Advisors is proud to support the transition to digital finance around the world. Our team offers consulting and professional services on online asset and wealth management solutions, lending and p2p, crowd investing and fund raising around the world. We are uniquely placed to cover both planning and executional aspects of all our ideas.