FinTech Lending leverages data, technology, machine learning, and marketing to better identify, underwrite, and serve customers. The combination was groundbreaking and swept businesses across the industry. The initial group of FinTech lending companies that debuted over 15 years ago included Zopa, Prosper, LendingClub, and PayPal. Companies like Amazon and other familiar names were added to the mix after 2010 to focus on marketplace lending for consumers of small and medium businesses.
In today’s landscape, this is the foundation for all new products in the lending sector. A series of technology-enabled startups have emerged, providing more accessible, affordable, and faster access to credit. Gradually, with the advent of machine learning models, upgraded technology infrastructure, and access to a large amount of data, FinTechs can focus on their value propositions to the customers.
With more data publicly available, cheaper FinTech infrastructure, open-source AI capabilities, and commoditized marketing strategies, FinTech lenders need to start looking elsewhere to remain relevant.
FinTech lending 2.0 focuses on more than just data, technology, digital marketing, and machine learning models. They focus on finding innovative ways to de-risk the borrower to drive down default rates, resulting in more competitive pricing and broader reach.
The pandemic made us realize how closely connected the world is. Regional trends may soon start impacting other businesses, and it won’t be long until a significant shift in the global financial landscape. As we move forward, it is important for businesses to look at the current trends globally and what they could mean for the future of lending and the financial landscape beyond 2022.
Embedded financial services – Even beyond the banking industry, financial instruments are increasingly integrated into products and services worldwide. Point of Service (POS) financial technologies, such as lending tools, are becoming increasingly popular with consumers, as they ease the sales process by allowing clients to apply for credit and other instruments without leaving the store. For example, the payments system Klarna has over 90 million customers worldwide to whom they provide short-term credit.
AI and risk management technology – Businesses are increasing their investment in smart technologies like AI which can detect and prevent fraudulent activities. Smarter technologies allow companies to access and utilize data effectively, for example, by using OCR (optical character recognition) to spot discrepancies in documents or using AI-powered scoring tech, which helps lower risk to lenders by smartly analyzing data.
Digital automated approach – Companies have also started to focus on streamlining processes and digitizing paperwork. By leveraging automation, there has been a reduction in the hassle of form-filling with faster and more integrated processes. This is an attractive proposition, not just for the younger customers who prefer digital services but also to ensure consistent data-keeping.
Personalized finance – Today’s customers demand curated services that fit their needs. An increase in demand for tailored services has led to an increase in investment in AI to help analyze consumers’ data and allow businesses to personalize. For example, this might be tailored loan risks and rates for lower-risk consumers or premium services on offer.
With the rapid strides that digital lending has taken in recent times, there are certain challenges that are yet to be fully addressed, and companies thinking of upgrading should take account of these.
Data management risks – An increase in data requirement and a change to how data is stored that forced companies to prioritize data management and its security. Issues like the ability to cope with responsibilities under GDPR laws and dealing with data hacks in a new technology landscape still need an answer. Moreover, there are ethical issues concerning AI, data, and analytics, and by prioritizing data management at the start, businesses can set their solution up for future success.
National and international regulations – Financial and tax laws vary based on the location of the business and need to be regulated for lending and account purposes. For lending providers, it is important to check the regulations of target markets to ensure that the business operates effectively and legally. Local regulations may act as a hindrance while offering services in some regions.
Intermediaries and communication – As borrowers digital assistance from lending organizations, there might be some lack of clarity regarding the actual service provider, the legal status, and the type of loan. Lending institutions should make their services, repayments, and interest rates as clear to clients as possible irrespective of regulations. This increases the likelihood of a better understanding of credit obligations and better loan repayment rates.
De-risking through financing – FinTech companies have figured out an innovative and mutually beneficial way to lend funds for businesses by focusing on specific activities that help boost financial health.
Leveraging another line of business – With an increase in investment in FinTech from large tech companies like Facebook and Google, to name a few, they have better access to customer data than the primary banks. It would not be surprising if every company in the future becomes a FinTech company.
Focusing on niche markets – FinTech Lending 2.0 sees beyond credit scores and other similar parameters. Businesses are focusing on specific customer segments and are building strong equity through better attraction and retention of customers.
Focusing on positive selection – FinTech Lending 2.0 is leveraging partnerships to provide services as benefits. This has helped reduce risk, decrease the acquisition cost, and create competitive barriers to entry.
Traditional banking providers lag behind their more tech savvy FinTech competitors, but there are areas where they hold a distinct advantage with a potential to leverage this transformation trend. Let’s take a quick look at some of these opportunity areas.
Established infrastructure – Traditional banks have a solid infrastructure setup, with an experienced team, the experience of dealing in large data, and an existing technology platform. These organizations need to connect with experienced financial technology providers to develop a strategic plan for digital transformation. Onboarding the right lending tools and quickly accelerating the capacity to service the current client base would be a good starting point.
Client trust – When it comes to money, clients’ trust is hard-won, easily lost. While the trust in digital providers is increasing, a significant section of customers still trusts the banks. Fintech provider Plum noted in a client survey that 91% of users still opt for a traditional provider or combination of fintech and traditional, showing wariness to change fully to a new one. This is the opportunity for banks to answer the demands of the modern world by adopting new technologies and methodologies.
Ability to diversify lending – incorporation of lending styles like P2P, market platforms, and supply chain leaders will help banks offer highly competitive services in line with modern market needs. Adopting new types of lending, or at least more flexible lending, allows banks to capitalize on the emerging market of non-traditional loans. They could potentially offer more competitive rates than FinTechs and stand a chance at seizing the market.
It is predicted that digital transformation will play a significant role in how businesses function in 2022 and beyond. In the wake of the global pandemic, we will see struggling businesses rise from their own ashes, transform their way of working and develop an integrated digital strategy.
For those seeking to access the lending industry or enjoy the benefits it offers, 2022 is the right time to start working towards it. This is an exciting time for the financial services industry with significant potential to access the technology in its formative stages and help build their business.
