Fin-techs Give Traditional Banks a Run for Their Money
For small and medium enterprises (SMEs), securing loans through traditional banking procedures continues to be a challenge. Factors such as information asymmetry, lack of means to prove creditworthiness, and complicated application procedures make the lending process cumbersome. Small businesses face the dilemma of preparing the successful loan application as they fear being rejected. Further, there is a lack of information about innovative means of alternative funding that are at easy disposal of consumers. This is how digital lending platforms have come into play and transformed the fortunes of SMEs.
Apprehensive traditional banks are slow in the uptake of innovative technologies that are capable of boosting their service standards. Flourishing fintech startups, on the other hand, are giving high street stalwart banks a run for their money. New lending models, customized and unique products, faster application and data triangulations are some of the factors that have led to changing lending dynamics.
How Digital Platforms are Changing the Lending Process
The advent of financial technology companies has changed every aspect of the lending business. Be it the lending model or the product offered, lending services offered by fintech has dwindled the traditional banking scenario. Here is how the banking business has changed.
New Lending Models
To begin with, the first and foremost transition is the introduction of the new lending models. The age-old practice of traditional banks whereby deposits are accepted from customers to lend them to borrowers at higher interest rates resulted in the exploitation of borrowers. Now, the scenario has been completely subverted with the introduction of peer-to-peer lending where banks no more act as middlemen. Fintech companies such as LendingClub and Prosper have adopted this model and have facilitated a venue whereby individuals can earn interest simply by offering funds to other individuals.
One SME lending platform Iwoca has dwindled the lending market as it has funded about 25,000 small businesses so far across Europe. Since its inception in 2012, it has been operating across the UK, Europe, and Germany. In 2018, the firm became profitable while traditional banks continued to struggle. In February 2019, the fintech company raised equity worth 150 pounds with the aim to fund another 100,000 small businesses in the next five years. The key feature of the financial technology company is that it offers instant loans with time duration reduced from months to minutes. The loan application is an easy process and does not require submission of a lot of documents. By deploying machine learning technology, the fintech analysis the performance of the business. This is done through linking to accounts like Paypal and e-bay.
Offering Customized Products
Unlike the general classification of products offered by legacy banks such as mortgages, personal loans, etc., fintech offers customized lending products on the shelf. Companies such as SoFi and Earnest offer online student loans, personal loans, and other customized and unique products that are easily available.
Climb is one such student loan fintech that has raised $50 million in lending capital from Goldman Sachs to offer loans at competitive interest rates. Since its launch in 2014, the company has originated loans worth about $100 million and funded nearly 10,000 students. Moreover, it has partnered with over 100 universities. Student Loan Hero is another fintech platform that manages student loans by analyzing the financial information of each student. Customized solutions are provided and recommendations suiting their needs are given.
Regardless of the type of loans sought by the borrower, Fintechs are attributed for their faster service delivery. The application process is an easy sail and the time period of loan disbursal has been shortened from months to minutes. On the other hand, banks take a weeks time just to fill the application. The founder of peer-to-peer conference LendIt “Kabbage” is known to have provided funds to small businesses within 7 minutes. This is mainly because of the availability of a lot of primary data and verification of financial information from user accounts.
Fintech companies leverage data points to offer loans expeditiously. A decade ago access to data was negligible. Now, fintech companies rely on platforms like Paypal, eBay, and Amazon to get information on financial transactions of the borrowers, their paying behaviors to understand if the applicant will be able to repay loans. Other than this, data from sources like Facebook, Yelp, LinkedIn and multiple other sites is amassed and analyzed using data analytic tools to get insights on the prospective borrowers.
In addition to leveraging quantum of data, Fintech also relies on automation of the underwriting process to fast-track the process. This not only enhances customer experience and productivity but also reduces operational cost. Traditional banks, on the other hand, still rely on the human interface for such tasks and risk assessments. Therefore, Fintech companies are changing the lending space into more evolved ways. It will continue to flourish and is poised to see a bright future as more and more borrowers are turning to alternative funding to meet their needs.