What do Sayfudin, a farmer and raw materials provider; Ratna, a weaver of doormats; and Bayu, a university student; have in common? They have all been able to secure their future through lending provided by fintech platforms.
Fintech lenders are often seen as enablers of financial inclusion, serving those who have been underserved by traditional financial institutions. These new non-traditional methods of sharing money have allowed investors to flourish while giving those who may not qualify for a traditional loan to access the money they need.
But are their interest rates actually competitive? Do they also encourage consumers to spend beyond their means? Are fintech lending platforms profitable themselves, and do they pose a viable long-term alternative to traditional banks?
Let’s explore the fast-evolving fintech lending landscape.
A loan at your fingertips
The traditional way of borrowing money from a bank via loans and mortgages is being joined by options like crowdfunding and peer-to-peer lending. According to Accenture, fintech lenders can be broadly split into three groups.
First, peer-to-peer marketplaces are platforms where individual investors and lenders meet to realise money exchanges. Risk is taken by investors themselves. Second, online lending is where predominantly institutional investors lend money to borrowers and the risk is taken by the platform. The last category is fintech tech, which provides infrastructure to traditional banks, such as credit automation and NPL management.
Fintech lending is making small business finance and consumer loans more accessible, also in terms of convenience and speed. A blog by The World Bank highlights that alternative lenders have been helping small businesses weather the Covid-19 crisis, providing a lifeline and supporting their recovery.
Is everything just rosy in the world of fintech lending then?
A lesson from Wonga
An in-depth study by The Harvard Business School has shown that consumers using fintech loans tend to sink further into debt and default more often than people with similar credit profiles borrowing from traditional banks. These findings contradict the fintechs’ supposed ability to use data and analytics to improve credit risk assessment.
Perhaps the most notorious example is the downfall of payday lender Wonga, which mis-sold loans to hundreds of thousands of people and charged interest rates as high as 4,000%. The Financial Conduct Authority found Wonga’s debt collection practices unfair, and ordered it to pay £2.6m in compensation. Its business model also came under pressure by a new regulation that put a cap on the cost of credit.
The evolution of the fintech business model
Examples such as Wonga put fintech lenders’ business models under closer scrutiny by the public. According to Deloitte, despite their innovations, online lenders have limited ability to compete with banks because of high and unstable funding costs, raising questions about their long-term sustainability.
While fintechs tend to have lower operating costs, Accenture’s analysis has shown that they face difficulty in scaling and becoming profitable. They also tend to have really high marketing expenses and high costs of sustaining customer acquisition rates.
Such considerations are opening up questions about the future of fintech lending and the evolution of their business model. Will we see more partnerships with traditional banks? Will banks acquire fintech lenders or vice versa? There is likely to be no single answer to these questions.
One interesting example is the Lending Club, a fintech that became a bank. Its rival, SoFi, also obtained the bank charter through an acquisition of a small community bank, which is said to be a viable alternative route to independently obtaining a national banking charter.
Regardless of what the future lending ecosystem will look like, one thing has become certain. Fintech lenders have transformed it for good, particularly by reorienting customer expectations. From now, every player in this space, be it traditional or disruptive, will be expected to offer a frictionless experience, marked by convenience and speed.
If you wish to learn more about Wildfire’s fintech credentials, get in touch.