By Stephen Sheinbaum
Financial technology companies had a big year in 2015. An industry that few people outside of specialized lenders had heard of suddenly became a household and Main Street word.
Many alternative finance and FinTech companies raised lots of private money in 2015. Better still, many small businesses in a wide variety of industries came to understand that, rather than wait for a bank to turn down its request for a loan, they could turn to an alternative and get the money they needed to get on with their business.
I think FinTech will build on its accomplishments in 2016 and capture even more market share. I also predict there will be five major changes to the industry which will define which of the many FinTech companies in the marketplace now will emerge as true leaders.
- Regulation from Washington: I’ve been calling for increased federal regulation over the industry for some time. Done properly, regulation can eliminate uncertainties and give FinTech companies a clearer picture of where the growth opportunities lie. Federal regulation would also blunt the patchwork of state rules that have begun to crop up. As business people in many other industries know all too well, coping with state regulations costs time and money that can be better deployed elsewhere.
- Increased sltaffing: Yes, the FinTech industry has deftly used technology to eliminate most of the headaches and roadblocks in lending to small businesses. But I believe data modeling and algorithms can only take us so far. Big data can tell us a lot about the ability to repay, but well-crafted questions may help us to better understand the willingness to repay. To be a leader, a FinTech company must also have a well-trained staff that can properly develop business with customers. A simple conversation decreases fraud and brings a more personable element to the process. For borrowers, finding the right lender is a big decision and not one they want to go through without speaking to someone about their options. Ramping up staff is going to be a challenge for some companies in the current tight labor market in the U.S., and they will also have to invest in training.
- Viewing banks as partners: Many FinTech companies have tried to portray traditional banks as the Evil Empire. That’s just not helpful to the small businesses we are trying to serve. In 2016, I think smart players in FinTech will understand that superior technology combined with traditional bank’s broad client relationships will develop more productive collaborations; banks will come to understand that partnership will be an approach that will be far more cost-effective than building their own platforms or trying to update legacy systems The partnerships that emerge in 2016 will involve new players–and new approaches. The white-label technology and APIs that are being rolled out by some FinTech companies will be a low-cost way of bringing more collaborations between FinTech and more kinds of banks, as well as other service providers to small businesses.
- From big data to unstructured data: The FinTech industry has developed an entire industry around utilizing structured data in new, meaningful ways. In 2016, I predict we will see the emergence of unstructured data as an effective aid to the underwriting process. Unstructured data is far harder to parse and to implement, but the companies that mine its complexities well will go far to set themselves apart from their competitors, opening even more funding opportunities to deserving small businesses.
- Consolidation: Now that FinTech is being perceived as a “hot” industry, it has also become an industry which is attracting many new competitors. I am not anti-competition: It is a healthy part of the development of every industry. But every explosive period of development in a technology or sector is inevitably followed by consolidation, and FinTech will be no different. How could it be otherwise when you have sources like DealIndex identifying more than 1,250 crowdfunding platforms around the globe, and Grant Thornton finding more than 600 P2P funders in China alone? Some of the consolidation will claim under-capitalized FinTech companies; others that haven’t pursued partnerships or developed their biggest asset—their people—will find themselves surpassed by companies that have invested the hard time and effort into these critical steps.
It goes without saying that there will be initial public offerings in 2016 for some of the leading FinTech companies. But without meeting the other challenges of our industry, a unicorn may be just a unicorn.
Stephen Sheinbaum is the founder of Bizfi, an aggregation marketplace that offers many kinds of alternative funding, from short-term finance, to longer term loans, equipment finance and lines of credit.
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