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Global Industry Study Reveals Fintech Lenders are Evolving Fast and Moving Up Market

Global Industry Study Reveals Fintech Lenders are Evolving Fast and Moving Up Market
New Economist Impact research study shows changing mindset of traditional banks to partner with fintechs; 76 percent of industry leaders see partnerships as the future for small business lending

Q2 Holdings, Inc., a leading provider of digital transformation solutions for banking, released a global research study conducted by Economist Impact in collaboration with Salesforce. Entitled What is shaping the ecosystem of small business lending?, the study reveals a rapidly shifting landscape in small business lending where “partnership thinking” is increasingly the norm, enabling small business lenders to move more quickly, effectively and at scale with the help of technology.

“Q2 is committed to enabling these emerging partnerships and is excited by the faster, easier application and funding experience for borrowers, as well as the increased profitability for the bank and fintech participants.”

The new research shows traditional banks’ competitive strategies have evolved away from rivalries with fintechs, such as payment players, peer-to-peer lenders and crowdfunding platforms. More than three quarters (76 percent) of survey respondents see collaboration among traditional banks and fintechs as the future.

“Traditional lenders are realizing that collaboration with fintechs is accelerating the speed of innovation and driving a better user experience,” said Q2’s Chief Strategy Officer Will Furrer. “Q2 is committed to enabling these emerging partnerships and is excited by the faster, easier application and funding experience for borrowers, as well as the increased profitability for the bank and fintech participants.”

Fintech lenders are most active in the smaller loan space (under US$50,000), but are gaining traction in the larger-dollar realms. Although 50 percent of alternative funders have an average loan size of US$50,000 or less; 41 percent are issuing loans between US$50,000 – $500,000; and 7 percent are focusing on loans of US$500,000+, which has been the domain of traditional banks.

The size of the global lending industry is large and growing. Data from the Bank of International Settlements (BIS) reveals that the global average of total credit to non-financial corporations stood at 110 percent of GDP at the end of 2020, up from 95 percent a year earlier. With the arrival of fintechs on the small business lending scene, new battle lines have been drawn between traditional lenders and challenger banks.

According to the study, alternative funders are seizing the opportunity to serve the unmet needs of small business borrowers, and they’ve started to gain market share. Faster and nimbler fintechs are leveraging automation, artificial intelligence, cloud and APIs to issue more small business loans, particularly as COVID-19 exacerbated the need for liquidity among small businesses at the very time that traditional banks were shying away from increased risk.

Additional insights from the global Economist Impact report include the following:

  • Megatrends Constraining Worldwide Growth – Global lenders report three significant constraints hindering their growth: fallout from the pandemic, scalability of technologies and pressure on margins.
  • Near-Term Impacts – 43 percent say new technologies, such as automated decision making, will have the biggest impact on their businesses over the next 12 – 24 months. This scored well ahead of the pandemic’s economic recovery, which ranked second at 36 percent.
  • Personalization is Vital – 71 percent say personalization and individualization is vital for building customer loyalty, with more mature digital banking adopters in North America and Europe strongly agreeing at 92 percent and 94 percent respectively. Newer adopters in Australia/New Zealand strongly agreed at just 28 percent.
  • Environmental, Social and Governance (ESG) – 73 percent say ESG is playing a role to better address the needs of the underserved and underbanked individuals. As investors increasingly apply these non-financial factors in their analysis process to identify material risks and growth opportunities, they’re in alignment with global trends toward considering community-building, non-financial factors in lending.

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