One of the biggest developments in the past few years of financial services has been the rise of fintech – financial services technology innovation that is seeking to bring the spirit of Silicon Valley to the financial services industry.
Fintech companies are trying to make financial services more transparent, more efficient and more user friendly at all levels by introducing new financial products and services, offering new ways of processing payments and moving money and generally developing new ways of cutting costs and improving the user experience when dealing with the financial system.
One of the areas of fintech that has been quickest to adopt new technologies has been online lending. By creating a new market for alternative methods of borrowing money – both for businesses and consumers – online lenders, marketplace lenders, P2P lenders and platform lenders have embraced technological innovations to drive efficiencies, cut costs and expand opportunities.
Financial technology cuts costs
By offering loans online, online lenders are able to operate a business model that is much more cost-effective than the traditional bank model of doing business. Instead of having to maintain a network of bank branches and pay for expensive legacy IT systems, many online lenders are able to operate more efficiently.
This makes it possible for online lenders to reduce the costs of borrowing for customers, and even afford to extend loans that might not have been possible for more cost-conscious traditional banks.
For example, according to this article from The Economist, online lenders’ ongoing business expenses as a share of outstanding loan balance might only be 2%, compared to 5-7% for traditional lenders. With a lower cost structure, online lenders can make more affordable loans, or even make loans that might never have been possible before.
Online lenders are data-driven
Online lenders are more willing to find innovative ways to assess risk and identify creditworthy borrowers, in ways that go beyond a credit score. For example, online lenders typically are willing to look at a broader range of data to determine whether a borrower can qualify for a loan, such as social media reviews, online sales totals, shipping data and accounting records.
These data-driven lending factors are often more egalitarian and fairer than credit scores alone, and more accurate than a traditional bank loan application process.
Online lenders move faster
Online lending technology makes it possible for customers to get approved for loans more quickly than ever before because online lending platforms can automate so much more of the underwriting and approval process.
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Unlike banks, which are often using antiquated legacy systems, online lenders have a more up-to-date technology foundation that delivers real-time data assessment, quicker loan decisions and ongoing monitoring of borrowers’ creditworthiness.
The traditional bank landscape is changing fast because of the new innovations of the fintech movement. Even though banks will never go away, people’s conception of what 'banking' really means and which products and services must be delivered via banks is changing rapidly.
Ideally, online lending will help the financial services sector become more efficient, more responsive to customers’ needs and perhaps a bit more accessible and fair to borrowers of all kinds – especially the ones who don’t at first glance meet the ideal standards for a traditional bank loan.