3 Ways the Fintech Industry is Making Lending Easier
Jun 30, 2018 00:00
In a letter to shareholders, JP Morgan Chase CEO Jaime Dimon warned that "Silicon Valley is coming." As the revolution in apps has disrupted other industries, so will it be with the staid world of banking. People have been fascinated by how the app Uber managed to grow to a worldwide operation that has replaced a monumental amount of taxi service from New York to London to Mumbai. Much of Uber's rapid expansion results from how little it costs to run an app versus a taxicab company. Silicon Valley innovations in the financial sphere are likely to run on the same model.
As indicated in The Economist, new fintech applications have vastly lower expenses than traditional and even online banks. For example, many fintech apps which marries private lenders and borrowers, has operating margins of just 2 percent, while banks average 5 to 7 percent. Fintech's lower margins are forcing banks to compete, which will make life easier for borrowers in 3 fundamental ways.
Fintech is much leaner than legacy banks like JP Morgan Chase, which explains why Jaime Dimon is concerned. Fintech is free of regulation, much like Uber is free or regulations cities place on taxis. Fintech is not stuck with legacy IT systems or branches that require high operating budgets.
As a result, fintech is busy at work providing financial services at a lower cost. Lower interest rates and lower fees will threaten banks as fintech grows more accessible and accepted by consumers. Forced to compete, banks will have little choice but to offer better products and better prices.
Alternative risk assessment systems
Banks remain in the mode of using credit scores to assess loan prospects. Though this system has worked in the past with borrowers who fit the banking structure's mold, it has always marginalized smaller borrowers, especially small businesses. Banks simply cater to large business because that's where they make the most money on interest.
Because fintech has lower operating costs and money is provided by private lenders instead of the company itself, fintech apps can provide competitive loans to small business and consumers, making just as much profit. In addition, fintech can assess risk using algorithms that search online information, such as social media profiles and logistics firm use to determine the health of a particular business.
More stable credit markets
Fintech brings more players into the lending game. Because now private lenders and venture capital money is more available, the credit markets are no longer dependent totally on the banks. As a result, markets are less likely to see the type of rapid plunge that affected the world in 2008.
For borrowers, fintech provides great benefits. Increased competition and diversified lending options bring better interest rates and more innovative lending products. For example, Credible provides a platform for student loan borrowers to shop for the best loan options. Unlike federal student loans, private student loans have interest rates that vary between lender. Some lenders cater toward borrowers with higher credit scores, while others provide better options for borrowers on the lower end of the credit score scale. By using Credible, borrowers find the right lender for them.
In an era of competitive disruption from technology companies, no industry enjoys immunity. The banking industry, like the taxicab industry, will be forced to adapt to new market realities. For borrowers, fintech promises to bring tremendous benefits.
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