Until recently, the rise of Silicon Valley did not really affect the way the finance industry does business. But financial leaders like Antony Jenkins, the former chief executive of Barclays, are sending an urgent message: that time is over. Wall Street and Silicon Valley have met, and fintech is here. The February 2016 McKinsey Report leaves no doubt that this trend is growing: in the past five years “nearly $23 billion of venture capital and growth equity has been deployed to fintechs,” the report says—and $12.2 billion of it in 2014 alone. This is a welcome message for consumers, especially millennials who have high expectations for what a modern user experience should be. However, unable to rely on their legacy systems any longer, traditional lenders will need to respond – or risk becoming disrupted.
One option is to build internal innovation groups, as several industry leaders have already done. In spring 2013, Capital One, long committed to innovation and entrepreneurship, achieved internal innovation with its Labs initiative. In 2014, Citi launched Mobile Challenge first in Latin America and soon thereafter in the United States and globally: a digital innovation competition to “build the next generation of financial technology.” In early 2016, Quicken Loans followed with a mortgage tool called Rocket, which aimed “do for mortgages what the Internet did for buying music, and plane tickets, and shoes.” However, these are just the successful examples.
Traditional lenders know their terrain; they’re experts at what they do. But deep technological transformation takes a different approach. Jumping in head-first and building out technology in-house has drawbacks that many in the industry likely want to avoid. There’s the time and the expense: Quicken Loans, for instance, dedicated five years and a team of 450 to build out Rocket. There’s the fact that it’s simply hard to foster a culture of innovation and to bring in the right talent in unfamiliar territory. And there’s the risk that, after investing all of this, the innovation attempts don’t always pan out. When combined, those factors can lead to the unfortunate outcomes we don’t hear about: hundreds of millions of dollars and years of time sunk into IT projects that fail and disappear.
As a result, many lenders have begun to favor an alternative to housing their own innovation: instead, partner with a company that knows tech. There are many deep tech companies with expertise in exactly the pieces of fintech that Wall Street hasn’t often handled. This approach has many advantages – beginning with the fact that, as Forbes notes, it enables lenders to cut costs. When J.P. Morgan partnered with OnDeck Capital in 2015, the goal was part of a larger strategy announced nearly a year earlier by the bank’s Chairman and C.E.O., Jamie Dimon, to reduce the “pain points” that can come from traditional brick-and-mortar lending experiences. Their plan? To partner with the types of startups that had used “a lot of brains and money” to unite cutting-edge technology with finance, he wrote in the 2014 letter to shareholders. In doing so, Dimon wrote, fintech startups had raised the bar for how “seamless and competitive” banking could—and should—be. And as the Wall Street Journal reported in December of last year, this approach met their goal. The February McKinsey report notes that, for a bank acting alone, to achieve such success “would be a multiyear process,” and yet, “simplification, digitization, and streamlining opportunities exist across large swaths of lending operations.” This is the crucial nexus where traditional lenders and Silicon Valley should work together.
Blend is built for successful partnership. At Blend, we know we are not mortgage lenders—but we do know technology. We believe in the power of a team in which everyone does what they do best. That’s why we are excited to work with several top 30 lenders today to help them originate data-driven mortgages that will let them be more efficient, compliant, and borrower-friendly in a matter of weeks. The Blend system helped originate $6B in loans in the last quarter of 2015, and we’re excited by the partnership we have with our customers today that will allow us to build and innovate together in the future.
This post was originally published as a guest contribution on LendIt’s blog.