The lending process has changed dramatically over the course of the past years, and so has our perception of loans. This is first and foremost reflected in the stock of personal loans, which has increased to $120 billion as of March, more than double compared to 2012.
Because they are unsecured, personal loans have been associated with people with a bad credit record and a precarious financial situation that did not recommend them for other financial services, but FinTech startups have redefined the way loans work, making them smarter, more flexible and more accessible. Now, the loan market has never been bigger and banks are starting to pick up on the trends started by FinTech lenders:
Faster loan application and approval
The client’s interaction with the lender starts before the loan is approved, when they are comparing options and submitting their application. About a decade ago, the idea of getting a loan was inevitably tied to gathering tons of paperwork, sitting in a queue at multiple banks and then waiting for weeks to get a reply. Now, applying for a loan is just a matter of clicks and all the steps of the process are simplified:
- Before applying, people can use loan comparison tools to see which financial service is right for them and get an estimate of how much money they can borrow. There are also extensive review services that get into detail on the ups and downs of each option.
- Once they’ve settled on the right lender, people can simply submit their application online, no paperwork or trips to the bank required. Some online services even allow people to pre-apply for a loan and they get a personalized recommendation depending on the details they provided.
- Loan approval takes on average less than 24 hours, because lenders harness the power of Big Data and no longer rely on long and overly complicated analysis processes. Some FinTechs have automated the process so much that they can analyze and approve a loan in as little as a couple of hours.
Flexible lending criteria
Although a person’s credit history remains a valuable metric in determining whether or not they are eligible for a loan, thanks to FinTech companies, the credit score is no longer the only criterion used. In fact, after online loan application and approval, flexible lending criteria is the most groundbreaking and disruptive trend that FinTech companies have brought to the industry. Unlike a few years ago, when it was almost impossible to get any kind of loan from a traditional bank without a flawless credit score, now categories such as students or small business owners can access funding solutions without resorting to questionable lenders.
But if the credit score is not that important anymore, how do Fintech lenders know how to select their borrowers? This is where Big Data comes in.
We live a data-driven world and FinTech companies use the large volumes of data available to assess client risk. In just a few minutes, they can pull up details such as:
– Real-time information on account balance and transaction history
– Customer spending patterns
– Tax payment assessment
– Financial transactions across multiple channels, such as PayPal or MasterCard.
– Suspicious account activity
Every person has a type of digital portfolio which, when analyzed by the lender, can reveal important details: the likelihood of a loan not being repaid, or the rate at which loss could be recovered. Unlike the risk assessment technologies available in the past, the ones used today by FinTech companies allow them to predict the risk before the lending takes place.
An extended portfolio of financial services
As millennials gradually become the main target audience for financial services, financial institutions must understand their needs and preferences and deliver an offer that caters to them. Banks have been quite slow to adapt, which is why FinTechs have a head start. For example, while most banks still have long and tedious bureaucratic procedures that need completing before the client can take advantage of any service, FinTech companies have reduced direct interaction to a minimum. The borrower no longer has to talk to a bank representative in order to get a loan or inquire about a funding option. Smart solutions such as AI-powered banking advisors give clients all the information they need, increasing customer engagement and providing personalized advice that surpasses any forced interaction with sales staff.
Security is key
Given the strong link between FinTech companies and Big Data, security is obviously a top concern and without it, this very innovation wouldn’t be possible. In order to keep their customer data safe, FinTechs utilize top-of-the-line security systems, sometimes even Blockchain technology.
Although FinTechs and banks were initially competitors, now we can see a shift from banks. As the effects of the economic crisis wore off almost everywhere in the world, banks are trying to catch up and incorporate some of the services that FinTech offer in their own portfolio: applying for a loan online, opening a savings account without going to the bank and other customer-centric solutions. Experts even talk about the rise of a new hybrid, the Fintech bank, which combines the traditional banking infrastructure with modern FinTech innovations.