Fintechs seem intent on selling their secrets to banks

By Ryan Weeks on Wednesday 17 October 2018

Editor's PickOpinionAlternative Lending

Lending-as-a-service continues to be a hotspot in finech, as OnDeck doubles down on helping banks lend to SMEs.

Fintechs seem intent on selling their secrets to banks
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Yesterday, New York Stock Exchange-listed online lender OnDeck announced the creation of ODX, a subsidiary focused on helping banks digitise their small business lending processes.

The move is the continuation of a strategy begun in 2015, when OnDeck struck a licensing partnership with JPMorgan Chase. That partnership was then deepened in August last year.

ODX, a wholly-owned subsidiary on OnDeck, will be pitched to a wide range of banks seeking to upgrade their SME lending offerings. The tool will allow banks to field loan applications digitally, to make instant decisions and to advance funding in as little as 24 hours.

ODX is said to combine software, analytics and professional services, but is available on a modular basis, meaning customers can pick and choose what suits them. OnDeck says it can help banks offer improved customer experiences, portfolio growth and reduced processing costs.

OnDeck is a pioneer of online lending to small businesses, and ODX will leverage that proven expertise by collaborating with banks to provide their small business borrowers with fast and reliable financing online,” said Noah Breslow, chairman and chief executive officer of OnDeck, in a statement.

Brian Geary, formerly vice president of OnDeck’s bank partnership unit, has been appointed to run the new business.

OnDeck is by no means alone in selling its tech to banks. Kabbage, a close competitor, is both a business lender and a leader in the software-as-a-service market. It has partnerships with a number of European banks, including Dutch bank ING.

In the UK, challenger bank OakNorth has ridden its ACORN machine (another lending-as-a-service product) to a $2bn valuation. As well as selling the thing, OakNorth also uses ACORN to underpin its own secured lending activities. Indeed, the underwriting engine sits at the very heart of the business.

Beyond ACORN, OakNorth is really just a rapidly growing but fairly straightforward savings and loan bank. Which begs the question: why sell your prized asset?

It’s a question you could, in fact, ask of a growing number of fintech firms.

The obvious answer is revenue. Software/lending/banking-as-a-service models are becoming increasingly prevalent within fintech, an industry in which many leading firms have struggled to turn a profit. It’s an obvious means of making a quick buck, sure, but one wonders what fintech firms are giving away in the long-term. 

In my view, legacy tech is not a permanent problem, it's a window of opportunity. While the window remains open, the challenge for fintech firms is surely to win as many underserved customers and as many disenchanted bank customers as possible. Eventually, by hook or by crook, incumbent financial services firms will catch up. At that point, fintech companies that have failed to make significant inroads may well find they've missed the boat.

For me, SaaS offerings serve to shorten the window of opportunity. That doesn’t make it a 'bad' product, per se. For example, challenger consultancy firm 11:FS launched a new banking-as-a-service product named Foundry yesterday. 11:FS consults with financial services firm seeking to digitise; having digital banking architecture on its shelves makes total sense.

Fintech firms selling their secrets makes less.

Then again (tying myself in knots now...), perhaps it's all about growing the market opportunity by changing customer expectations. Fintech founders often say at industry conferences that they're confident competing with banks for customers online. In helping banks to upgrade their online offerings, perhaps firms like OnDeck and OakNorth are playing the long game after all, accelerating the full migration of financial services to the World Wide Web.

I'm afraid the cop-out conclusion is that only time will tell. 


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