A new report by the Federal Reserve Bank of New York is shedding light on the true impact startup fintech companies are having on the mortgage industry.
The report, titled, The Role of Technology in Mortgage Lending, used quantitative data to break down the impact innovative technology is having on the mortgage industry. It identified problem areas in traditional lending and questioned whether fintech companies can help with those problems.
Here is what the report concluded:
“recent technological innovations are improving the efficiency of the U.S. mortgage market. We find that FinTech lenders process mortgages more quickly without increasing loan risk, respond more elastically to demand shocks, and increase the propensity to refinance, especially among borrowers that are likely to benefit from it. We find, however, little evidence that FinTech lending is more effective at allocating credit to otherwise constrained borrowers.”
To me, this can be interpreted that fintech companies are not as disruptive as it is made out to be. They may do things a little bit faster and are more nimble than traditional banks, but they are not expanding the market necessarily. This opens doors to something we should all be considering more: partnerships.
There is huge opportunity here for large companies to partner with small startup companies. Large banks can learn from the speed of these smaller companies (the report found that fintech lenders decrease processing time by approximately 10 days, which translates to about 20 percent of the average), and smaller fintech companies can lean on the market presence of large banks to help expand their market share.
So, instead of being competitors, how can they be partners?
There are three ways a large bank can work with a fintech startup, each of which carries its degree of risk:
Be an early customer – Help the startup mold its product in the short term into something you could have a bigger engagement with in the future. (Low Risk)
Make an equity investment – Acquire a part of the company and leverage limited upside of the disruptive technology, without the implications of developing internally. (Medium Risk)
Acquisition – If a true belief in the future of the product exists, go all in and buy it out to monopolize any and all upside. (Highest Risk)
In deciding what is best for your company consider your risk tolerance and determine where a startup/disruptive technology fits into your Business Model Portfolio. Let that be the driving force as to the level of partnership you agree to. Moreover, as enterprises want to invest in innovation more intelligently they must first determine where new business models fit on the Business Model Portfolio chart. Ensuring growth of the enterprise as a whole involves many small decisions about how to align smaller investments into business models that can be incorporated into the core business as they mature. More on that here.
Technology is here to stay, and the companies (big or small) that leverage it to bring consumers what they expect, are the ones that will future-proof themselves.
Fintech companies may have thought they came to take over, but we are finding they are likely meant to be utilized to help larger entities continue to be successful. It is up to those larger entities to be willing to accept that partnership though.