FinTechs Disrupting the Lending Business

The lending business is also closely associated, and sometimes have been inter-changeably used, with the credit markets. The credit markets have the same formal and informal categorization. There are typically two types of credit systems—open-end and closed-end credit options. In the open-end type of credit, the credit is of a revolving nature, i.e., the amount of credit that can be borrowed each month and has to be paid back after a specified time period. Closed- end credit is a type of credit wherein a fixed amount of borrowed capital is returned in installments. When the installments are of equal size and paid back monthly, then the installments are called as equated monthly installments (EMIs). The customer continues to pay interest until the original capital borrowed (also called principal) is paid backk.

The amount outstanding on credit cards is a typical example of open-end credit, and housing, car loans, etc., are typical examples of closed-end credit. There are

multiple variations of credit. A special mention needs to be done for subsidized credit, wherein the government or an institution provides credit at a lower interest rate or with a relaxed return period. There is also a form of credit that people take from one paycheck to the next in a revolving manner to bridge the gap between the expense and paycheck. This is called a payday loan. In another variation, people borrow against insurance policies and sometimes against their retirement accounts. There is another form of mortgage that usually senior citizens avail of and is known as a reverse mortgage. In this kind of mortgage, a person borrows against his/her property, an annuity amount that will be settled with the property ownership being transferred to the lender at the end of the term.

The overall lending business is also dependent on the type of mortgage that is kept under lien for borrowing the amount. If the person borrowing against nothing except a guarantee to return the amount, then it is called as unsecured debt. Whereas if the debt/loan is taken against a movable/immovable property then it is considered a secured debt. There are more complex definitions and variations of the above-mentioned debt and lending terminologies, but we will restrict ourselves to the form of lending mentioned above. Please note for the remaining part of this book, we will be using the following words interchangeably—mortgage, lending and credit—since we are talking about the credit/lending industry as a whole and not about a specific process within.

After the financial crisis of 2008, compliance -related requirements to approve loans increased for established credit and lending companies. This resulted in their processes becoming more cumbersome and time -consuming. FinTechs emerged in this space. They were not only changing the prevalent business models, but were also ensuring regulatory compliance. Since they were agile, they could easily transform existing products or bring in new services/products that would address the huge opportunities that lay untapped in the informal lending space. FinTechs are offering multiple different types of lending which were not addressed by estab-lished companies owing to their being either informal lending processes or them being perceived to have insignificant transaction volumes. The different types of lending offered by FinTechs can be broadly categorized into the following types of lending:

Additionally, there are FinTechs that are offering platforms that are disrupting the businesses supporting/enabling the lending businesses. These platforms thus offered are either available as stand-alone offerings or bundled into the overall lending platforms. The customer journeys offered by these platforms have been quite disruptive and have not only driven their adoption, but also have been instru-mental in making the entire process less time-consuming and simplified. “Cutting the queue,” “loan approval under a minute” and “get the best loan offer” are some of the catchy phrases that have been implemented in reality by these platforms. The business functions that FinTechs are disrupting the most are listed below:

  • Origination
  • KYC
  • Aggregators for loan providers
  • Credit score providers
  • Loan/credit/mortgage counseling
  • Loan repayment schedulers
  • Loan enablers

FinTech disruption in the lending business is primarily centered around the follow-ing types of lending.

Post Author: newfintech

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