Are challenger banks or fintech’s transforming the lending market or just providing digital makeup?

We live in a dynamic world where industries have transformed rapidly over last decade due to digital technologies. Financial services are no exception and have seen enormous disruption, and now financial services are not just dominated by banks or credit unions. Fintech organizations are revolutionizing finance services especially in lending and are bringing paradigm shift in this space.  There are many Fintech organizations, which are doing phenomenally well and are considered serious competitors for traditional financial institutions.

Financial services industry is highly regulated, and traditional financial institutions were sceptical of new technologies, features, products & services until they have been thoroughly worked out by someone else. On the contrary, Fintech are young, innovative and are very enthusiastic. They are experimenting new technologies (Cloud, Artificial Intelligence, Blockchain etc.) to improve customer experience.

Lending is a key service for financial institutions and depending upon geography, compliance & regulations, the lending process may become complicated. It becomes more complex for unsecured lending in countries where you have many borrowers from unorganized sectors.

There was certainly a need to change the lending process because requirements are changing. Nowadays customers even require loan to buy a mobile phone, laptop or go for a vacation. Small & micro businesses also sometimes require loans to meet their working capital requirements. Fintech organizations are evolving every day and are offering various kind of lending to cater the need for different sectors.

This blog will cover four types of lending offered by various Fintech organizations, and risk & compliance aspects related to lending.

• P2P lending

Many of Fintech organizations have provided marketplace to lenders and borrowers to come together and offer peer-to-peer (P2P) lending service. Lenders and borrowers have to register themselves and after comprehensive verification process, lenders and borrower can do transactions. These platforms also suggest best deal to lenders & borrowers based upon their profile. These platforms certainly provide better offers to both lenders and borrowers as compared to traditional financial institutions.

Faircent is one of the P2P lending platform in India and claims to have 6000 registered lenders, 30,000 registered borrowers and an average of Rs 1 crore loans disbursed every month. Central bank and other regulators are also working on policies to ensure new business models & services can be used to provide better customer experience. Faircent has received Certificate of Registration (CoR) as an NBFC-P2P from the Reserve Bank of India (RBI).

• SME Lending

Small & medium size enterprises (SMEs) are generally not cash rich organizations and don’t have capacity to be well prepared for any unforeseen cash flow problems. We’re seeing this problem with many of SMEs nowadays due to Covid-19 lockdown in India. These organizations require working capital to ensure their existence.

Fintech organizations have also started participating in SME lending and some of these organizations have started providing unsecured loans.  Due the digital transformations entire loan application process has been on-line and loan disbursement can be done within 3-5 days.

Capital Float is one of the platform, which provides short-term loans to SMEs to meet their working capital requirements. Some of the loans are also collateral free which makes life much easier for small businesses because they don’t need to mortgage their assets.

• Invoice Discounting

Invoice discounting is the method of using company’s unpaid invoices to raise working capital from a lender. In most of the businesses, payment terms are between 30-90 days after invoicing, which becomes a challenge for small businesses, which have started recently.

Traditionally financial institutions have been discounting invoices for small & medium businesses. Invoice discounting involves transfer of rights on an asset (invoice) from the seller to the lender at an agreed value.

Fintech organizations have started invoice discounting using online platform. KredX and Lending Kart are few of the Fintech, which are offering invoice discounting in India.

• Intelligent Lending

Fintech ecosystem is loaded with disruptive technologies – big data, artificial intelligence and blockchain. Some of the Fintech organizations are using innovative ways for lending.  SALT is an organization, which allows people to leverage cryptocurrency for taking loans. Borrowers can use Bitcoin, Litecoin or Dogecoin and can take loans. SALT uses smart contract using blockchain to ensure the crypto is safely transferred.

Another organization, TALA is using big data to serve under-banked population. TALA’s consumer lending app usages cell phone data – like social connections, texts, calls and bill payments to determine creditworthiness.

TALA has teams located in Kenya, the Philippines, Tanzania, Mexico and India, and to date, the company has secured more than $500 million in loans for its borrowers.

Compliance & Risk Management

Traditional financial institutions are in the business since a long time, and are well versed with regulatory requirements and associated risks. Fintech has a bright future but should start focusing more on regulatory requirement because they are not just a technology company but they are also moving towards becoming financial intuitions.

In India, Central bank (Reserve bank of India), Ministry of Electronics and Information Technology, Ministry of Corporate Affairs and Securities Exchange Board of India are the bodies, which governs financial institutions and Fintech. So far all these regulators have been very supporting and have encouraged Fintech.

Fintech organizations provide best of the breed services to their customers with the help of best in class technologies and on the other hand, traditional financial institutes have long lasting relationship and trust of their customers.

Number of Fintech start-ups are growing rapidly across the global. As per Statista (https://www.statista.com/), the number of Fintech start-ups have grown from 12,131 to 20,925 during 2018 to 2020 worldwide. India has seen a tremendous growth in Fintech in the recently years, as per Invest India (https://www.investindia.gov.in/), the overall transaction value in the Indian Fintech market is estimated to jump from approximately $65 billion in 2019 to $140 billion in 2023. The numbers and trends are encouraging and interesting but we need to see how this translates in to real value moving forward.