What Are Fintech Lenders and Why We Need Them
Keeping up with everything fintech is difficult. Fintech lending companies are definitely in that category. Answering the question of what are fintech lenders can help your business and shouldn’t be ignored. Your business could save a ton of money. That’s why in this post we explain what fintech lending is and how you can make the most of it.
What Are Fintech Lenders? A Quick Overview
Before we get into the details of fintech lending companies, let’s take a step back and talk about fintech. Fintech is simply the combination of finance and technology, which aims to deliver the financial services you need efficiently using specific technologies, including AI (artificial intelligence) and APIs (application programming interfaces).
So what are fintech lenders then? Fintech lenders provide the financial service of lending to individuals and small businesses in a cost-effective, efficient manner. Whether you’re looking for small business lending or a personal loan, fintech lending companies can help.
Fintech lenders serve an important role among financial institutions since they effectively expand the reach of loans to more people. Allowing borrowers better access to funding based on their exact requirements while helping lenders make more accurate underwriting decisions makes the digital lending market more inclusive and efficient.
4 Important Characteristics of a Fintech Lender
The fintech lending revolution is underway and there’s no stopping it. There are many options out there that may or may not suit your exact needs. Let’s look at the most important characteristics of fintech lenders.
1. Online-Based Platform
As you would imagine, the most important characteristic among fintech lending solutions is that they offer an online platform. You want to interact with a clean website and dashboard instead of endlessly talking on the phone or going back and forth over email.
Fintech companies are 100% online-based, so there’s no reason why getting business loans or having your credit history and credit scores checked should look like a traditional lending process. While traditional banks can leverage fintech lending solutions, fintech lenders accomplish virtually everything through digital channels.
2. Use of Technology to Streamline the Lending Processing Times
Helping borrowers access funding is one thing, but it’s another to make the digital lending process efficient. This is especially true since 66% of SMEs want access to faster credit. By leveraging technology, fintech companies can offer more loans to more borrowers without all the friction.
An example of this is using alternative data combined with AI to better evaluate borrowers’ credit history and credit scores. By leveraging this tech, approval processing times can be dramatically improved, resulting in a better approval process and also helping avoid lending fraud.
3. Personalized Loan Offers for Your Financial Goals
No one person is the same. Everyone has a unique financial and risk profile when it comes to getting loans. Through the use of alternative data and artificial intelligence, financial institutions can offer a more tailored, personalized approach to loan offers.
This also makes for better-informed lending decisions and benefits individuals, small businesses, financial institutions, and lenders in general. Technology allows more fine-grained financing solutions to everyone regardless of their financial health, credit score, cash flow, etc.
4. User-Friendly Interfaces
If you can’t navigate an online-based service, you might not be able to get the most out of it. Potentially you could make an error and hurt your chances of getting a loan or mistakenly provide information that’s inaccurate.
Fintech companies have a leg up over more traditional financial institutions because they’re tech companies. In a tech-heavy market, you must create a beautiful UI/UX (user interface/user experience), or else no one will use your fintech app. Borrowers: beware of poorly created websites, mobile apps, and digital platforms in general.
What Are The Different Types of Fintech Lenders?
Understanding the important characteristics of digital lending platforms is key. Now let’s dive into what makes one fintech lender different from another.
Marketplace Lenders
Marketplace lenders are the most common types of fintech firms offering loans. Simply put, they take a potential borrower’s information using an online application and run them through an automated approval process. The borrowers’ credit history, credit score, cash flows, and potentially other independent third-party data are evaluated, resulting in a unique credit offering.
A fintech marketplace lender’s main advantage is its availability to virtually everyone. Of course, interest rates and loan terms will vary across different individuals and business owners, but it’s a very democratized space.
The main disadvantage is that since nearly anyone can apply for a loan, less sophisticated borrowers can take out potentially unsafe loans. This can be addressed through better educational content as well as a good screening process.
Peer-to-Peer (P2P) Lenders
Peer-to-peer lending (P2P lending) is where two distinct individuals or entities will create a lending deal with one another. One individual is the borrower and the other is the lender. Peer lending is becoming increasingly popular among the digital lending sector business models.
The main advantage of peer-to-peer lending is that people or entities can do business with each other one-on-one. There’s very little overhead during the lending process apart from the lender connecting and organizing the process.
The main disadvantage is it’s more difficult for peers in the peer-to-peer lending process to properly evaluate each other. This could lead to lending fraud and other potential issues.
Balance Sheet Lenders
Balance sheet lending, also known as portfolio lending, is when digital lenders provide loans from their own capital. This essentially turns the fintech into a bank as well as asset managers since they now have risk on their books.
The main advantage to balance sheet lending is the relationship is very direct similar to how traditional lending with a traditional financial institution works. This opens the door to lots of different types of loans and banking services, including mortgage lending, online bank accounts, savings account, and more services akin to traditional banking.
The main disadvantage is that since these digital lending platforms are usually vertically integrated, you may not get the best version of a single service you’re looking for. Across the financial services landscape, less vertically integrated fintech companies offer highly specialized, highly efficient products that others in the lending industry can’t offer.
The Biggest Benefits of Fintech Lending
Fintech lending can benefit individuals and small businesses in many ways, but here we’ll look at the benefits that provide the biggest impact.
Convenience
One of the biggest benefits of fintech lending is the convenience it offers to both borrowers and lenders. Anyone can participate in the lending process, which further democratizes these important services. This means more people can access business loans, mortgage loans, and other lending opportunities that conventional lenders can’t offer.
Lower Interest Rates
A beautiful secondary effect of improving the lending sector through technology is there’s generally less risk. Lower risk means lower costs mean lower interest rates. By leveraging our digital data with technologies like AI, efficiencies can be uncovered resulting in costs being lowered.
Faster Approval Process
Filling out loan documents at traditional financial institutions is a relic of the past. Nowadays, you can fill out an online form with all of your relevant data and find out whether you can access debt financing solutions. Say goodbye to delays.
Higher Approval Rates
The lending industry has kept a lot of people from borrowing, largely due to their lack of data. With the proliferation of data coming from our mobile devices and more, lenders can make better-informed lending decisions leading to more people having access to the capital they need. This can really make all the difference for a small business.
No Collateral Requirements
As the fintech sector grows and matures, so does our way of providing loans to those who need them. With sufficient evidence of creditworthiness and potentially other factors, lenders can fund loans to small businesses and others without the need for collateral.
The Most Notable Risks of Fintech Lending
Risks aren’t completely mitigated for a fintech company or its customers when participating in the fintech lending space. Let’s look at the more notable risks involved.
Lack of Regulation
Traditional lenders are highly scrutinized for the lending products they offer customers. This is especially true following the 2008 financial crisis. Unfortunately, regulators often lag tech innovation and this is no different for fintech innovation.
Cybersecurity Risks
We do most everything online nowadays and hackers know it. We trust companies with online bank accounts, electronic payments, KYC (know your customer) data, and more, so their ability to keep those actions and information safe is more important than ever.
Limited Transparency
Most fintech lending companies are startups and are often private companies, not public. This means that they don’t have to be as transparent as traditional banks do. Another risk to keep an eye out for, especially since the collapse of Silicon Valley Bank (SVB) and others in 2023.
Data Privacy Concerns
The fintech lending industry is driven by data and lots of it. Since they heavily depend on customer data to make their lending products and services optimal, they collect and store a ton of it. Similar to the cybersecurity risk, it would be quite bad if any of this data was accidentally leaked or even used in a way that users aren’t necessarily happy with, like reselling data to ad companies or something similar.
Final Thoughts
Fintech lending is a booming space within the financial services and tech industries. More and more people will be signing up with them since they can offer fantastic, personalized services at competitive prices. Traditional institutions will have a tough time competing with them.
The future growth in the fintech lending market is projected to be 27.4% between 2021 and 2030. That’s a massive growth rate that traditional lenders are going to have to address if they want to stay relevant.
But the fintech industry is inclusive thanks to how the tech works, especially through the use of APIs. For example, a leading mortgage lender, a bank offering traditional loans, car dealerships, or anyone needing help making a credit decision can leverage this tech by connecting to it with software. The way technology is moving, the pie will continue to grow.
Author
Grant's a fintech content marketer and SEO strategist who works 100% remotely. With years of professional experience working alongside the largest fintech brands and marketing agencies, he's well-equipped to help grow his clients' businesses with effective content and SEO strategies.