Technology is changing every single industry, and lending is no exception. While lending used to be the exclusive purview of banks and credit unions, numerous fintech companies are now extending loans to consumers and small business owners, and their practices are changing the loan process.
The innovations of fintech companies have changed nearly every aspect of the lending process and that includes the basic model that makes lending possible. The traditional model of lending embraced by banks for centuries was to accept deposits from some customers in order to extend loans to other customers, and to earn money under this model, banks typically charged borrowers more interest than they paid to savers.
Fintech companies have subverted this process with peer-to-peer lending. Companies such as LendingClub and Prosper have adopted the same model once made popular by music piracy sites. Essentially, they have created a venue whereby individuals can earn interest by lending money to other individuals, and they take a small fee for brokering the connection. Rather than submitting a traditional application, borrowers secure loans by presenting compelling stories of why they need capital.
While peer-to-peer lending may have been the fintech industry’s first foray into the world of loans, these companies did not stop there. Companies like SoFi and Earnest quickly jumped into the marketplace with student loan financing and consolidation as well as personal loans and mortgages. Other fintech companies now offer factoring loans, invoice financing, business lines of credit and a range of other financial products.
Regardless of the type of loan on offer, fintech companies tend to pride themselves on offering faster application, approval and funding times, especially compared to traditional lenders. Banks typically take weeks to approve loans and even credit card providers, which often approve applications quickly online, take weeks to print and distribute cards.
In contrast, peer-to-peer lending companies can approve and fund loans in less than 24 hours, and some companies are even faster. According to Peter Renton, the founder of the global peer-to-peer conference LendIt, “Kabbage… [can] deliver a loan to a small business lender in 7 minutes.” He continues to explain the core of the fintech lending process, “the way they do it is they connect all the data and the more data you connect with them, the cheaper it’s going to be.”
Fintech companies who offer online loans utilize a massive number of data points to determine how likely the borrower is to repay the loan. Initially, lenders used eBay or PayPal data to look at the amount of sales businesses were posting, and they offered loans based on sales data. However, fintech lenders have now incorporated data from UPS, Amazon, QuickBooks, Yodlee, Yelp, Facebook, LinkedIn and multiple other sites. This data was barely available a decade ago, and even five years ago, amassing data from all these sources was not possible. Now, the data can be collected and crunched within seconds to create a snapshot of the borrower’s creditworthiness and likelihood of repaying the loan.
In addition to harnessing data in innovative ways, fintech companies are also automating the underwriting process. The automation process extends to risk assessment as well, and this helps to speed up the lending process, especially in contrast to some banks that still rely on humans to handle this part of the process. Ultimately, automation lowers operating costs, allowing fintech companies to offer loans with competitive rates to borrowers.
Because of their new lending models, fintech companies are able to embrace more borrowers than ever before. As a result, a new crop of small business owners, students, consumers and others who may have struggled to access loans from traditional banks can now access the capital they need from fintech companies. In particular, small business owners can now access loans and lines of credit without collateral, a virtual impossibility for many business owners a generation ago.
While fintech companies are changing the lending process, they are also mirroring millennials views on technology and lending. While 70 percent of millennials say they would rather visit the dentist than the bank, fintech companies make it easy for them to avoid banks. Similarly, millennials tend to see lending as the potential domain of tech companies, while in contrast, their parents saw lending as an offshoot of department stores or supermarkets. To wit, millennials say they would trust companies such as Google and Amazon to launch a bank, while their parents tend to see businesses with brick-and- mortar storefronts as more capable of launching a financial arm.
Because their focus is technology, fintech companies focus on safety. They have tech measures in place to safeguard consumer details. In particular, they use tokens to briefly see data from third-party sites rather than taking or saving it.
Fintech companies are changing the loan process in exciting ways. The changes affect every aspect of the process from how consumers engage with lenders, to how profits are generated, to the how loan applications are assessed, to the underwriting process. Ultimately, the hope and the challenge is that the fintech industry will ultimately continue to revolutionize the lending process in ways that make loans more affordable and more accessible to a wide range of people.
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