JP Morgan joined hands with OnDeck Capital to help make loans available to its small business customers in an inexpensive and quick process. Bank of America similarly inked a deal with ViewPost in an effort to provide small business users with a way to manage their cash flows better.
These deals are reflections of a fundamental shift in big bank’s attitudes for fintech startups. Although fintech startups were once viewed as a “threat”, banks have been increasingly open to the idea of partnering with them. According to an IDC and SAP survey of 253 banking institutions, over 35% of banks view fintech startups as possible collaborators and 15% view them as possible tech acquisitions.
Although mutually beneficial for both parties, fintech startup have now found themselves in a precarious situation. Many of the fintech startups that partner with banks operate on a “rent a charter” model. Essentially, banks are responsible for providing services and financing behind the fintech startup.
For example, around 80-90% of capital lent through the Prosper and Lending Club, a peer to peer lender, was institutional money. Despites lowering non-credit costs, many fintech startups have come under increasing scrutiny and regulations as a result of these partnerships.
In August 2016, the Federal Deposit Insurance Corp (FDIC) proposed legislation to increase supervisory attention to online lending services that use third party financers. The new proposal recommends that banks partnered with online lenders conduct yearly examinations, set performance standards, and require access to data.
On the other hand, fintech companies that choose to remain isolated from bank partnerships risk lacking the deposit base to fall back on as well as preventing big banks from entering their niche.
Slow growth and consumer default loans in the online lending sector have many people in the sector worried. Combined with online lenders decreasing their employee base and LendingClub involved in a fabricated loan data scandal, many online lenders are seemingly forced to join hands with banks as a safety net.
Some online lenders have found an escape route to both scenarios. Companies such as Mondo and N26 have been granted banking licenses in the United States and Germany respectively to test their products and services.
For many new players in the field, however, obtaining these licenses without the resources of a powerful institution is nearly impossible.
As fintech startups become more prominent, balancing regulatory procedures and disruptive innovation will certainly be key.