Competitive Advantage Rides on Technology and Legacy

Recently, we discussed the changes impacting the banking industry as non-bank companies have begun to employ investor funding and new automated models to underwrite loans with unprecedented efficiency. In the short time since this competition emerged in the marketplace, it has had a significant impact on consumer, mortgage, and small business lending.

"New competitors always will be emerging - and that is even truer today because of new technologies and large changes in regulations. The combination of these factors will have a lot of people looking to compete with banks because they have fewer capital and regulatory constraints and fewer legacy systems. We also have a healthy fear of the potential effects of an uneven playing field, which may be developing."

(Jamie Dimon, JPMorgan Chase 2014 Annual Shareholder Letter)

Banks’ Competitive Advantage in the Changing Landscape

We’ve discussed how important it is for banks to identify their unique strengths and balance that with a clear-eyed assessment of what they need to change within their current models. This proactive approach is vital to banks’ ability to operate effectively in this evolving and increasingly crowded marketplace.

There’s no denying that the new online competitors have struck a cord with the use of big data and algorithms to streamline the underwriting process. But it’s important to recognize that banks have their own competitive advantage. Banks are institutions with a long, rich legacy of working with the changes in consumer credit through up and down cycles in the economy.

Technology upstarts can’t replicate that history, but banks can adopt new technologies with a focus on enhancing the consumer experience.

A window of opportunity is opening. As they engage deeper in the marketplace, the new competitors have begun to experience some of the pitfalls that banks know all too well. A recent New York Times article highlights some of the concerns about the impact non-bank lenders are having on borrower's credit. 

“Some of these upstart companies are exhibiting their own troubling traits…Marketed as a way to improve people's credit scores, the loans are instead worsening some people's financial troubles. And when these people run into trouble…some of the new lenders are unwilling to modify their loan terms.”

The article goes on to say that Moody's Investors Service has issued a warning that the marketplace industry bears some similarities to mortgage lending in the period leading up to the 2008 financial crisis. This is due to the fact that these companies are marketing and approving loans, then quickly selling them off to investors. And because these marketplace companies don’t suffer a direct loss if the borrower defaults, it may prompt them to lower their credit standards.

This is not a model designed to counsel a borrower toward the most well informed and well supported, long-term decision. With efficiency as a priority, there’s little attention paid to lifetime value for the customer and lender. And as the consequences of this ‘drive through’ lending model come to light, the time will be all the more opportune for banks to remind their customers and communities of their dedication.

Here’s what we know. Technology has permeated every facet of the banking industry. And while technology brings risk, the future of the community bank absolutely relies on the ability to embrace and integrate it. New competitive upstarts can’t tell a story about generations of customer relationships, hands-on support, care through times of challenge. But you can. And you can learn to use technology to enhance all that you’ve done so well for generations.

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