Online Lending (B2B/B2C)

The digital channels have revolutionized the entire online lending space. Unlike most P2P lenders who act as merely a marketplace that facilitates lending by enabling investors to lend directly to the borrowers, online lenders use their own funds to lend to either businesses or consumers. Depending on the regulatory requirements, almost all of these online lenders have their own banking or financing arms. These lenders use digital technology to onboard, process and finally approve loans.

Also, they have some very well-defined processes for funding and underwriting these loans. After the 2008 debacle, it was evident that banks were finding it more and more difficult to provide loans to businesses and consumers. The established banks also lagged behind in providing a compelling digital experience. This is where some of the FinTechs like Ascend Consumer Finance, Avant, better.com,Earnest, Kabbage and OnDeck have chosen to grab the opportunity available. We will talk more about how FinTechs are transforming the entire experience around online lending using digital channels.

In the U.S. loan market, an individual with a low credit score would have a greater likelihood that his/her loan application would be denied by most of the established banks. This would mean that millions of customers’ loan applications would be denied. This includes people who would want to take out a loan for a rainy day. All of these such cases, in all probability did not get the loan as they would already be in debt at that time, consequently impacting their credit scores as well. This is where online lending FinTechs provide an opportunity for credit-worthy borrowers to borrow from them, despite low credit scores at high interest rates. The loan process in a traditional set-up could mean customers going on mul-tiple trips to branches of a bank or a financing company. The entire experience is time consuming and could be quite frustrating for the customers. Additionally, the verification of an individual for loan eligibility and the interest rate being charged is not a transparent process. In contrast to the established banks and financing companies FinTechs, through proprietary machine-learning algorithms and their online partnerships are able to complete most of the process entirely online and in a transparent manner.

There are websites by FinTechs that offer a list of quotes with the best possible repayment terms. Based on the search criteria provided by an individual, these sites offer multiple alternatives available with fixed and adjustable interest rates. Since FinTechs encourage transparency they differentiate between the options that have fine print or predatory lending options versus the ones that state their terms clearly. The user experience is also transformative with most of these FinTechs while searching for different loan options. Some of the FinTechs, besides aggregating and showing multiple options, usually are lenders themselves or they have a tie-up with an established lending agency/firm. Therefore, they are able to provide a seamless experience for the user’s to choose from different available options and then completing the entire lending process to finally issuing the money to the user. Some of these FinTech firms can display all the options in less than a minute and the entire loan processing can be done in less than an hour. Therefore, the process that used to take weeks/months to complete the loan processing, and was considered as one of the big milestone in one’s lending life, now takes about less than an hour to decide. For a customer, this is an out of the world experience and illustrates how online lending

FinTechs are transforming the lending space. FinTechs are not only changing the experience for their customers but also are changing their spending behaviors for a better future for them. In contrast to the established banks who are perceived to have caused hardships to average Americans, the FinTechs are being perceived as saviors for credit-worthy borrowers. These borrowers have been traditionally good borrowers, but cannot get loans in their hour of need owing to multiple defaults and high debt already, thus FinTechs are helping these borrowers in managing their finances. Additionally, they help the borrowers lower their interest rate by implementing a good fiscal discipline monitored by pro-prietary algorithms that helps a borrower in achieving a good fiscal discipline. Some of these platforms go as far as monitoring the fiscal behavior of most of its customers. Some of the behaviors tracked are lowering the overall debt level, restructuring the credit card debt and the ability to build emergency savings accounts.

Some of the other FinTech platforms guide customers on managing their credit score and debt repayment. Using gamification and a rich user interface, the user can manage their interest rates viably through the platforms provided by FinTechs. Therefore, it goes on to convey that FinTechs are not only there to make money, lest be quick money, but instead, they are bringing services and opportunities to people and helping them achieve their goals as well in some cases becoming the advisor-of-choice at affordable rates.

Some of the other online lending firms are transforming customer behavior in the online lending spaces by rewarding people for good repayment behavior. The reward is not in the monetary form, but instead, raises the level of customers to a privileged status. What it does is if a borrower has taken a loan out under a certain category, and if the borrower makes timely repayments, he/she will get upgraded to the next level, meaning that borrower is eligible to borrow more at lower inter-est rate. In the journey, an individual reduces his/her interest rates and increases his/her loan eligibility by making prompt payments. This fact correlates to a credit score, but is applied completely differently. This in turn induces good behavior among borrowers, thus making the entire financial industry trustworthy.

Besides lending to people who are salaried or with a certain source of income, FinTechs are involved in loaning to students as well. These FinTechs are changing the potential multibillion-dollar student loan industry that is envisaged to grow further. They are doing it differently by recognizing an individual as an individual rather than a simple “credit score.” This has made them favorites in the student and investor community as well. Some of them are helping shape careers and are becoming the guiding light for their job search. If we picture any big banks doing all of this, one can imagine how many changes they will have to make. They will have to begin by changing the approach of their relationship managers and prob-ably end by carrying out a number of technology changes. Thus, FinTechs, are “thinking for we (the customer)” rather than thinking to make more money for themselves. Some of the different ways these FinTechs are facilitating student lend-ing are looking beyond at the current needs of the student and betting on the promise of the future.

These FinTechs have their own proprietary algorithm to evaluate a person’s full employment, education and financial profile, thus, enabling them to provide loans to students and professionals who do not have a good credit score by a credit bureau, yet they are creditworthy. Using analytics and data science to the fullest extent, the platforms are able to assess the potential risk regarding the repayment capacity of an individual. Hypothetically, let us talk about Sam who was admitted to a top university for their prestigious baccalaureate program in computer science, but because he is a student, he will not have a good credit score to borrow money unless he has a co-borrower. This eventually makes the student take a high-interest loan. This in no way reflects the potential of Sam earning much more money in the future and being able to repay the loans as scheduled. This is where the FinTechs evaluate the potential, and provides a loan that is on par to a good credit scoring customer. Thus, they are able to serve the students aspiring for loans in a better way. Since the evaluation is based on a host of parameters, the amount is usually capped to few thousand dollars, therefore the overall default rate for such loans is very low. This helps in bringing down the interest rates charged to high-potential students and young professionals.

Some of the other FinTechs are offering loans to students based on their poten-tial return on investment (ROI). They consider each loan as an investment they are making on an individual student. One of the big problems with giving student loans is that repayment by the student is possible, only if his/her skills are com-pelling enough to secure a good job. To ensure students are deployable into get-ting jobs after they graduate, these FinTechs are working with colleges and schools that provide the right kind of training besides the standard education at affordable costs. Thus, giving loans to students from those schools that were spending less on marketing and infrastructure and instead focusing more on ensuring the stu-dents are deployable. These FinTechs have also partnered with schools to reduce the amount of loans the student has to pay back if they are not able to a find a job after graduation. This is a clear example of how some of these FinTechs are redefining the entire lending practice by not sticking to the standard credit scores. At the same time,

Some of the other FinTechs are offering loans to students based on their potential return on investment (ROI). They consider each loan as an investment they are making on an individual student. One of the big problems with giving student loans is that repayment by the student is possible, only if his/her skills are compelling enough to secure a good job. To ensure students are deployable into getting jobs after they graduate, these FinTechs are working with colleges and schools that provide the right kind of training besides the standard education at affordable costs. Thus, giving loans to students from those schools that were spending less on marketing and infrastructure and instead focusing more on ensuring the students are deployable. These FinTechs have also partnered with schools to reduce the amount of loans the student has to pay back if they are not able to a find a job after graduation. This is a clear example of how some of these FinTechs are redefining the entire lending practice by not sticking to the standard credit scores. At the same time, they are helping by connecting various stakeholders in the lending chain to offer a win-win arrangement for all.

FinTechs are also disrupting the business model by determining the creditwor-thiness of a student through proprietary algorithms and parameters. Based on the outcome of their evaluation, they provide loan at a lower interest rate to credit-wor-thy students. The FinTechs are going beyond providing loans and instead are help-ing students become part of the community that offers networking opportunities, career support, hosted dinners and many other events where prospective employers could hire potential individuals for jobs.

FinTechs are also revolutionizing the online lending for homes and auto mort-gages. Through online channels they are reducing the huge amount of paperwork involved in the lending process. Interestingly, they have been able to pass the savings on cost to the customer either in the form of low-interest rates or low commission fees. One of the most inspiring stories is of a bank in Brazil that had been trying to overcome the financial crisis created because of the big financial meltdown globally. The interest rates for nonsecured debt in Brazil’s post-financial crisis was hovering around 58% and in some cases for credit card loans it was hovering around 178%. The FinTechs found an innovative opportunity and they became the lender of choice for most consumers. These FinTechs started a service through which they would convert the unsecured loans of most of the customers into structured and secured loans. They did this by backing each one of these loans with a house or vehicle as collateral, thus decreasing the interest rate or in some cases extending the loan duration. This has made most of the loans affordable for a normal Brazilian household as not only are they out of the constant interest payout’s vicious cycle for credit card, etc. loans, but they can repay the loan at their pace.

It was not as if these channels were not available for most of the established Brazilian banks. But for them to do something like this, it would mean they would have had to do the following: (a) take regulatory approval to introduce a new product line, (b) ensure all the bank employees are trained for the same and (c) the decision making would have had to be decentralized. This would have been a huge risk for traditional banks. Additionally, they would have to change their technology systems to fit in this kind of arrangement. This clearly says that FinTechs are already chal-lenging the systems, infrastructure and processes banks have built up over the years. These FinTechs charge about 20% to 30% against home or auto equities. Also, these FinTechs have fewer branches and most of the processes are automated. Most loan applications are self-help applications, thereby reducing the infrastructure and man-power cost. Like most of the other FinTechs in the United States, these FinTechs also try to profile their customers using their custom algorithms. Consequently, it enables them to offer differential interest rates based on customer profiles.

Until now we have looked at how online lending is changing the consumer lending business. Let us also take a look at how online lending is changing lending for businesses around the world. It has always been a catch-22 situation when you are building your business, and I can relate to that because my wife had the same set of problems when she started her own start-up. The problem was that without money on the table, downstream businesses were not ready to offer any business deals. Banks were not ready to lend unless you have a sustainable balance sheet to show for at least a number of years. The small FIs that were ready to lend, were lending at about 24% to 36% per annum interest rate. The prevailing interest rate in India is about 9% to 11% for commercial loans. All of this despite you having a brilliant business proposal to work upon.

Therefore, the only alternative left is borrowing from friends or family to start the business until it becomes stable. Additionally, as with most fast-growing busi-nesses, the available working capital gets exhausted in fulfilling the orders and there is very little left to run the operations and replenishing the stock. Therefore, the lack of working capital could even lead to shutting down the business. The processes involved in getting working capital or start-up loans from established banks or lenders could take weeks and months and is subject to a very high level of scrutiny. Instead of focusing on business growth, the entrepreneur spends more time convincing the banks and finance agencies how their business is creditworthy. This sometimes could lead to the closure of good start-ups at an early stage. Some of the FinTechs sensed the opportunity and started financing small business start-ups and their working capital requirements. This type of financing when coupled with online lending is also known as B2B and C2B lending.

Business lending FinTechs provide loans for as low as a few thousand dollars to a million dollars at a nominal interest rate with repayment terms extending from 3 to 5 years. The loan-approval process depends upon the credit score of the busi-ness or individual. Again, like in consumer lending, the scoring mechanism could use the standard scoring mechanism available for the industry or could be done using some of the proprietary platforms by their respective FinTechs. The eligibil-ity for a loan application could range from a newly started business to businesses that have been in existence for more than a year. Thus, a business that has recently started can go in for additional capital or a working capital loan from them and the process is quite fast. Since the lending is done through automated loan processing mechanisms, the entire processing in some cases can be done as fast as in 1 day. This clearly indicates that all the documentation mess that was involved in loan process-ing with some of the large banks is now replaced by a fast processing algorithm by these FinTechs. One of the key features that customers like is that returning cus-tomers can avail low interest rates and waiving off of the origination fees—clearly identifying a loyal customer, which most large institution seems to miss out on.

Most of these lending FinTechs are making small business borrowers’ lives much easier by:

  • Provide financing for small loan sizes.
  • Do credit checks that many a times is done on parameters associated with an individual’s capability to repay, rather than the credit he/she has taken in the past.
  • Processing the loan quickly, thus making the money available when the busi-ness truly needs it.
  • Providing flexible repayment terms usually customized to individual businesses.
  • Provide a mobile app that could make the entire process from application to approval to payment quite simple.
  • Make the platform available to third party for integration with the desired APIs.

Consequently, these FinTechs are hugely popular and are being used by most of the small businesses for their working capital loans and short-term capital require-ments. These Fintechs being fast in processing comes as a real help for most of the entrepreneurs as against applying to conventional institutions, which would have taken weeks/months to process the same. FinTechs with more than a billion+ dol-lars worth of loan processing is an example of how small business lending FinTechs are disrupting their established peers.


Post Author: newfintech

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