Fintech disrupting personal loans segments

Aug 2018 | Team Rubique

The rapidly changing technology is also having an impact on the lives of people on a global level. Financial technology companies, also known as Fintech companies are constantly competing for gaining the market share. There are many changes which have been brought about by this evolution such as mobile payments replacing cash and credit cards, robot advisors competing with financial advisors along with many other. The ultimate benefit of this goes to the customer since they have new and cheaper products. The lending market has also been affected by this trend. In this article, we will discuss the way Fintech is impacting the personal loans market.

1)    Leveraging data analytics

The most disruptive ways Fintech companies are redefining the lending practices is through the use of their data analytics. Lenders tend to leverage data obtained from the applicants so that they can predict the risk with each potential borrower.

This approach is beneficial for borrowers in a few ways. Firstly, the procedure comes with a simple online application form and a faster review process. The most significant advantage which Fintech has over the traditional banking is operating without paper. The application process is paperless and digital, so it is a choice of many when applying for credit. The details can be provided within a few minutes with instant approval based on credit profile. For instance, many lenders require very few documents, and some even offer document verification process within minutes.

Data analysis gives lenders more accuracy in pricing which helps the borrower to get prices corresponding to their level of risk. Through data analysis lenders can access the borrowers which help them to offer loans to those customers who are unable to receive financing from traditional lenders.

2)    Adopting Electronic Payments

The benefit of predictive analysis is that it allows lenders to approve loans very fast, whereas the electronic funds enable the borrowers to disburse funds to borrowers quickly. Some lenders even claim that they can disburse within minutes. This is beneficial for borrowers especially individuals and small business owners, who can get the disbursement without waiting too long for it.

3)    Power of Crowdfunding

Another technology which has developed into a viable alternative to traditional loans is online crowdfunding lending. Crowdfunding makes it easier for individuals and businesses to raise funds with the aid of the large group of investors so that financing everything becomes possible. It gives a chance for the investors to diversify between the crowdfunding campaigns, so they want to lend to those borrowers who cannot borrow from the Bank. While private banks do not provide loans to people with lower credit scores Fintech uses this to their advantage and increase their credit penetration. So, crowdfunding is beneficial for many businesses and individuals.

4)    Branchless lending

Branchless banking has become the norm for the financial institutions nowadays. It has also become the competitive edge for the banks in modern times. Almost 60% of the cost associated is usually associated related to the location of the branch along with adequate staff required for the smooth running of the branch. Whereas online lenders have the benefit of operating with lower operating costs, offer competitive rates, and tailor their services efficiently according to the customer’s needs.

5)    Fintech on Blockchain

The banking industry has to deal with one of the biggest challenges which are the risk of defaulting borrowers. This is also one of the main reasons many lenders get locked out of the mainstream lending market.  Since the advent of blockchain technology, fintech can use distributed ledger technology in their business models. Blockchain makes it easier for users to trach specific transactions through time. Thus, when a lender applies for a loan, the credit history can be instantly accessed from the blockchain network resulting in expeditious loan processing. The best part about this technology as reported by the best online platforms is that borrower information is secure, verifiable and encrypted. This also eliminates the need for obtaining important documentation from the customers, before issuance of the loan.

As a result, many established lending institutions are embracing the power of blockchain. According to a report, it will allow the banks to save $20bn in infrastructure costs by the year 2022 of they adopt blockchain technology. The primary bottlenecks could be challenging such as setup, consolidation challenges of blockchain system with legacy systems, but in the long-term, it will prove to be very beneficial. Through this technology, lending institutions will be able to authenticate the identity of the borrower, verify the information of the loan applicant, along with enhancing the lender transparency of customers.

6)    Robo advisory

The growth of Robo advisory techniques will bring about a significant upheaval in the wealth advisory service industry. Due to its low cost and scalability, robo advisory will prove to be far more beneficial for the Fintech sector as compared to the traditional banking. As a result of these advantages, traditional investments firms are also adopting robo advisory services for wealth and asset management.

The banking sector is now faced with challenges due to the introduction and adoption of Fintech. Fintech is here to transform the lending market on an overall basis. Many reports suggest that Fintech companies can control a more significant share of the personal loans market. This move is expected to develop and affect the credit market since many companies are now embracing the Fintech along with other technologies which will redefine the financial service sector.

Thus, there are now two choices available for the banking industry: either to compete or collaborate. Collaboration is the recommended course of action for the banks which will enable them to enhance customer experience through a digital transformation and take advantage of the innovations of Fintech sector to improve their business.