The technological development in a rapid manner changes the way how people interact with banks. Fewer people are now willing to go and solve their money issues with clerks in real offices. Digital tools and interaction means have become even more popular: ATMs, online chats, mobile apps, Internet banking and of course online lending services.
The Emerging Online Financial Products
Until recently, digital instruments were just an add-on to traditional banking services. Thanks to FinTech, the financial landscape has changed drastically. Many FinTech startups emerged from the idea of creating a convenient and profitable solution than already existing banking products. For example, an equitable peer-to-peer lending (P2P) and online personal loan service, have become an alternative to the small individual or business loans from banks. The used scoring technologies make it possible to determine the borrowers’ creditworthiness almost instantly without addressing to traditional financial institutions.
According to 2017 “Fact versus Fiction: FinTech Lenders” report, FinTechs are now having a larger share on the personal loans market than banks or credit unions. The study proved the real increase of FinTech lending system in the recent years. For instance, during 2016 FinTechs equals 30% of all personal loan balances versus only 4% in 2012 and less than 1% in 2010.
The New Lending Model
So how do P2P (peer-to-peer) and P2B (peer-to-business) lending work? In this case, the borrower receives funds not from the bank but directly from the individual lender. The Internet is full of numerous financial services that work as brokers between lenders and borrowers. Such websites have an automated system of checking the borrowers’ creditworthiness.
The decision whether to issue the loan to an individual is made by lenders themselves. Sites-brokers are not responsible for any of the further actions related to the loan non-repayment – the responsibility is on the lender. Most of such loans are unsecured and the loan rates are either fixed or determined on the basis of a reverse auction. This is when a potential borrower sets the maximum rate at which he agrees to take out a loan, and potential lenders bargain with each other, offering loans at a lower rate.
Advantages of FinTech Lending
What are the perks of this lending model for borrowers? First, individual lenders set fewer and more flexible requirements for getting a loan than those set by traditional banks. Second, due to a reverse auction method, you can get a lower rate loan. Third, the applying process is super fast and takes in general up to 3-5 business days versus 30+ days at banks or credit unions. Finally, most of the reputable financial companies have a strong data security. This means none of the consumer’s private information will be revealed to third-party sites.
Speaking of the main advantage for creditors, you are likely to receive a higher income than if you place a bank deposit. However, creditors have to go with a higher risk of the loan non-repayment. Also, in most cases, there is a lack of a guarantee system and a collateral, as well as government guarantees of the fund return (as opposed to deposits reimbursed by the State Guarantee Fund).
More Loans to More Borrowers
The new FinTech lending model opens new opportunities to people who were not able to borrow from traditional banks and other financial institutions because of the poor credit history and other factors. Such loans are now available to the new groups of people who need an instant funding, for instance, small business owners, students etc. In particular, entrepreneurs got a chance to get a loan without collateral, which a while ago was a real obstacle for many business owners.
Millennials Choose FinTech
Millenials are the first generation to accept the real advantages of new technologies and ready to use them for their own convenience. When it comes to lending process, millennials no longer wish to visit bank branches personally, stand in lines, deal with unnecessary paperwork and wait for months to get the approval.
End of the Line…
Today we are already witnessing a drastic change in the lending model that existed for centuries. Consumers want to have a more flexible way to lend money but most importantly, they want this process to be quick. The FinTech industry already gave us this opportunity and hopefully, the following changes will be for the better.