Will the OnDeck Capital and JP Morgan Chase agreement result in a FinTech Breakthrough?
What does it mean when a tier one bank, JPMC inserts OnDeck Capital's (ONDK) online lending service into its business lending supply-chain? Is this the breakthrough that signals the triumph of new “FinTech” lending models over old?
The answer isn't simple - as it's both Yes and No. It is a milestone that heralds a new change in supply-chain models but, no it is not a sign that FinTech business models are superior. So what is it? It’s a marker that large enterprises are finally finding a new way of working in a cloud enabled world.
Why is the ONDK/JPMC move big news?
The internet enabled world of the 21st century changes the rules for large banks. In the 20th century, banks were successful by building and protecting scale, whether it be deposit size, AAA rating or branch network. In the 21st century, the battle is for access to consumers. This access is no longer through the physical world. Scale is now less important than reach. Speed, innovation and responsiveness make up the new requirements. These are unfamiliar characteristics for banks.
Enter stage right, nimble FinTechs. The real excitement is not the individual market segments that the FinTechs service; the real opportunity is for the large banks to create a data-driven infrastructure that supports a much more agile business model. An infrastructure that allows banks to couple and de-couple new capabilities easily, so that they provide accretive value immediately but also stream data for analysis and further innovation. In other words, less of a supply-chain and more of an intelligent ecosystem.
ONDK/JPMC Part of a Bigger Trend?
As regulators, like the UK Treasury push for banks to open up through standard APIs, this movement will accelerate. Click here for the UK Treasury Announcement.
Why is the ONDK/JPMC move not a breakthrough for FinTech overall?
There is no doubt that new entrants pose a clear and present danger to existing household names.
From lending to payments to core systems there are a multitude of new entrants, with new business models, springing up. The reaction of many established banks is to create a portfolio; ‘our FinTech’, and in so doing place a bet that will:
- Potentially pay off if the bet placed is well founded. |
- Protect the franchise in a market that drives quarter-to-quarter, immediately provide shareholder value through positive PR, and positive messaging on innovation
As far as placing bets, anyone would be pretty confident if not crazy, to bet against Jamie Dimon.
Of course where there is hype and opportunity (and a ton of money chasing finite projects), there are also hare-brained ideas in FinTech. Eighteen months of fist pumping enthusiasm for the sector is starting to give way to a more reasoned debate that calls out:
- Nimble FinTechs do not have a monopoly on doing smart things with data to improve pricing.
- Nimble FinTechs are not immune to, and may be more susceptible to, failures in governance that are franchise-killing as former darling LendingClub demonstrated earlier this year.
- Business models that depend on lack of regulation will not survive time and may not survive integration into regulated entities. The regulators are not going to be carried away by hype.
An example of this emerging new consensus: http://vedanvi.com/can-marketp...
But alongside the hype-driven get-rich-quick promises of magical new fraud and regulation-proof business models, there are clearly ideas which are real, robust, plays bringing efficiency, better services and market reach. Companies like Chris Zadeh’s Ohpen are turning some of the traditionally most complex core banking technology into a commodity you can buy.
So some FinTechs will be earth shattering, some will crash and burn. Whatever the risk, no one can ignore the opportunity. However, in the rapidly changing market you can only afford to commit early if you have created a cloud enabled supply-chain that allows you to insert as easily as decouple the FinTech solution you commit to.
That’s where the real promise and opportunity of FinTech will appear. The ability to make small bets and switch them quickly, will define the winners’ vs the losers.
What is the takeaway for banking executives?
Whether or not ONDK is the next big thing, it represents a shift in the way in which banks deploy capabilities. Because the FinTech space will remain a volatile phenomenon for some time to come, the underlying capability of a plug and play intelligent infrastructure is essential. You may be decoupling as frequently as coupling new FinTechs. That is part of fail-fast.
To read more about this agreement, click here for more information.