The pros and cons of fintech

Bank of England governor Mark Carney sees challenges ahead for the sector and those who regulate it, but there is no denying the advantages it provides borrowers.

The development of technology and finance go hand in hand. The banks’ historic need to respond to the demands of borrowers quickly has prompted them to embrace new technologies. Automated teller machines, cash points and digitisation have all improved the relationship between creditor and borrower.

Fintech platforms represent the latest chapter, a fact recognised by the governor of the Bank of England, Mark Carney, in a speech at the Deutsche Bundesbank G20 conference this week. “Fintech’s true promise springs from its potential to unbundle banking into its core functions of: settling payments, performing maturity transformation, sharing risk and allocating capital,” Carney said.

Despite some of the obvious advantages of the business model, there is still scepticism about the ability of online platforms to provide financing to small and medium-sized enterprises.

Carney’s speech follows a number of important interventions by senior figures in the financial industry. The former chairman of the now defunct Financial Services Authority, Adair Turner, warned about the quality of fintech lenders’ credit underwriting in their hunt for speed. Chris Philp, a Conservative MP, criticised the business model that results in a “misalignment of interests” between the platform and the lender.

Carney, too, shares concerns, specifically about the impact fintech may have on the broader market. “Changes to customer loyalties could influence the stability of bank funding. New underwriting models could impact credit quality and even macroeconomic dynamics. New investing and risk management paradigms could affect market functioning,” he said.

We’ve been here before. The concerns about the fintech sectors echo criticisms about shadow banking heard not long ago. But the growth of private debt has found that the asset class can serve traditional banking in alleviating institutions from taking on riskier deals, while still maintaining the relationship with the clients. With regard to fintech, online platforms can serve the very companies turned away by the leading financial institutions.

It’s further evidence that the relationship between banks and alternative lenders, including fintech firms, is not necessarily antagonistic, despite portrayals by some that it is. Banks can benefit from building relationships with fintech.

Fintech platforms have found an appetite among SMEs starved of credit from banks and which have utilised the internet to find new sources of lending. Indeed, the ability of online platforms to channel resources to SMEs has been noticed by European institutions.

The European Commission sees fintech as an integral player in its Capital Markets Union, where the aim is to increase the diversity of financing options for European SMEs. Closer to home, the British Business Bank has invested £40 million ($50.5 million; €47.1 million) with the Funding Circle platform to provide capital to UK SMEs.

Fintech platforms offer numerous benefits to the credit market. The trick is to ensure they are harnessed and risks controlled.

As Carney put it this week: “The history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts.”