Financial technology (Fintech) and the Internet have enabled the creation of online lending markets. Lending in the market is made possible by technology platforms that use scoring algorithms to determine borrowers’ repayment capacity.
Online lending platforms were first created by non-bank owners who act as brokers, collecting fees to match borrowers to lenders and provide them with multiple loan options to compare. They pose a real threat to the profitability of traditional lenders.
Julian Skan, Managing Director of Accenture Strategy for Banking and Capital Markets, told Forbes: “Banks are mobilizing to take advantage of industry changes, leveraging digital technologies and ecosystem business models. to strengthen their relevance to customers and regain their revenue growth.
Originally referred to as peer-to-peer loans, these offerings were rebranded as online lending markets when hedge funds and industrial investors entered the space.
Main advantages of online loan application
One of the most attractive features of finding loans online is the reduction in time and paperwork required. Fintech platforms boast that their algorithms can prequalify borrowers and securely provide them with faster approvals and funding.
They request access to borrowers’ current financial data to monitor their repayment capacity. Small businesses can then use the platform’s electronic invoicing, immediately borrow money against invoiced amounts, and automate monthly payments, among other features.
More lenders online than ever
Fintech online lending platforms have started partnering with banks and credit unions to reach out to small businesses that are not as comfortable with fully online transactions. Traditional lenders are eager to jump on the FinTech bandwagon to avoid being made obsolete.
With so many options, choosing where to apply for a loan online becomes complicated. Even Google initially provided venture financing which then partnered with LendingClub to provide better terms for Google partners. This allows Google to invest in the growth of its partners.
As a small business owner, will you consider online lenders to finance your business? The convenience of online banking is attractive to those who wish to bank from anywhere. Online lender Kabbage says 17% of their loans have been accessed via mobile.
A survey by Small Business Trends in December 2017 showed that online lending markets were the preferred source of financing for small businesses for 13% of those surveyed. Others are reluctant to complete loan applications online.
The 15-minute hybrid app with a local personal finance manager at Lendio franchises can overcome this reluctance. They have loaned $ 16 million to over 500 small businesses in just 18 months.
Uncertainties surrounding fintech and online borrowing
The United States lags behind Europe because there is currently no regulatory framework in place at the federal level. Fintech currently has to deal with several federal entities and each state.
In the United States Department of the Treasury Executive Order 13772 on Fundamentals of Regulating the United States Financial System, Fintech is discussed at length. They recommend that the IRS allow “faster, more reliable income verification” to “facilitate the lender’s ability to better integrate historical income data earlier into credit pricing, instead of using it for purpose. downstream verification of the subscription process ”.
They believe this would lead lenders to approve more loans with moderate credit scores, especially for small businesses. Small business growth models might indicate creditworthiness that could be used to consolidate personal credit card debt into a business loan.
Banks embrace online lending markets
Despite the uncertainties and challenges mentioned above, a 2018 research study of more than 200 banks by the American Bankers Association (ABA) found:
- 71% of banks were interested in partnering with a third-party digital platform for arranging consumer loans
- Almost 80% of banks were interested in using technology to support their small business lending
- 26% of banks were already using online or digital loan origination channels
- 80 percent said they would be interested in using the technology to support their small business lending business
The ABA believes that member banks will offer more lending to small businesses through automation as digital lending makes it more profitable.
Interested in finding out more? Check out our list of online lenders already operating in the small business lending arena.
Photo via Shutterstock