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Home FinTech

How Does Fintech Lending Work?

Brandan A. by Brandan A.
March 26, 2024
in FinTech
Reading Time: 4 mins read
How Does Fintech Lending Work

The emergence of financial technology, or fintech, has transformed many aspects of the financial services industry. One area that has seen significant disruption is lending, with many new fintech lenders entering the market in recent years and utilizing technology to streamline the lending process. This article will explore what fintech lending entails, how it differs from traditional bank lending, the advantages it provides, and the overall size and growth potential of the fintech lending market.

What is Fintech Lending?

At its core, fintech lending involves the use of advanced technologies and digital platforms to facilitate various types of loans between borrowers and lenders. Fintech lenders can gather and analyze extensive amounts of alternative borrower data, enabling them to make quicker credit decisions and complete the lending process fully online. They can also access funding sources beyond deposits, such as peer-to-peer (P2P) lending marketplaces or institutional investors on their platforms.

Common types of loans originated through fintech lending include personal loans, auto loans, small business loans, student loans, and mortgages. By leveraging technologies like automated underwriting systems, electronic signatures, and big data analytics, fintech lenders can often provide more customized loan offers at a lower cost compared to traditional banks and legacy financial institutions. This has opened up new sources of credit for many borrowers worldwide.

What is The Difference Between Bank Lending and Fintech Lending?

Fintech Lending

There are some notable differences in the lending processes employed by traditional banks versus newer fintech lenders. In general, bank lending relies more heavily on manual underwriting that evaluates limited data points exclusively from a borrower’s credit history, income levels, and collateral offered. This can make it slower and may overlook some qualified applicants. Bank approvals are also often subject to lengthy in-person or telephone application steps.

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In contrast, fintech lenders are at the forefront of using alternative data sources like cash flow patterns, education histories, social media behaviors, and other online signals to build more robust quantitative risk assessment models. Their digital platforms enable near-instant automated evaluations of broader applicant pools within minutes without human intervention. This allows fintech companies to make real-time financing decisions and deliver funds directly to borrowers’ accounts, providing a smoother process for both parties.

While bank loans are still typically funded on-balance sheet by deposits, many fintech lenders employ innovative peer-to-business and institutional investor funding models that expand available capital sources. Their proprietary lending technologies also facilitate dynamic interest rates and 24/7 online servicing portals for self-service account management by borrowers. Overall, the digitalization of processes has made applying, getting approved for, and repaying loans much more efficient compared to legacy systems.

What Are The Advantages of Fintech Lending?

The unique capabilities of fintech lenders have brought meaningful benefits to both borrowers and partners involved in the lending process. For applicants, fintech models can offer faster underwriting and funding cycles, more customized and automated products, and greater transparency into real-time application statuses. Alternative data sources give more holistic insights to approve broader demographics outside traditional bank parameters as well.  

On the funding side, fintech lenders provide investors like peer-to-business marketplaces competitive investment opportunities with attractive segmented risk-adjusted returns. Their digital platforms likewise lower distribution costs for originating and servicing loans compared to physical branch networks. The data and risk analytics generated from fintech loan volumes also create valuable IP assets and consulting services to monetize over time.

In terms of impact, it is increasing credit accessibility for underserved groups and small businesses worldwide. It expands financial inclusion by evaluating income streams outside traditional pay stubs and credit reports. Fintechs’ dynamic pricing also rewards good payment behaviors with better terms, positively influencing overall financial health for millions of customers globally at scale. Ultimately, their digitization is modernizing legacy systems to move money faster and put capital to work more efficiently.

How Big is The Market?

Fueled by these advantages, the overall market for fintech lending has grown enormously in recent years and is projected to continue substantial expansion. By one estimate, global fintech lending platforms originated over $650 billion in loans in 2021 alone across both developed and emerging markets. Another report valued the worldwide industry at over $200 billion currently and predicted growth at a compounded annual rate of nearly 25% through 2028. 

Breaking this down further, the US dominates as the single largest national market for fintech lending at nearly $100 billion in 2021. However, China has emerged as an increasingly competitive region and was rated the second-largest country by loan volumes originating that year. Other high-potential future markets include India, Southeast Asia, and several Latin American nations where digital and financial inclusion are priorities as more citizens come online. Overall, fintech lending looks poised to help unlock trillions in new bankable credit needs globally in the coming years.

Conclusion

The emergence of fintech lending has been widely disruptive yet highly beneficial overall. By leveraging powerful technologies like artificial intelligence, big data, and digital channels, fintech lenders are optimizing credit delivery through faster, more automated, and transparent processes. They are expanding financial inclusion and access to credit for underserved communities at unprecedented scales. While challenges remain, continued progress in digital lending promises to reshape the future of finance globally by unlocking vast pools of unused capital through new innovative models. Fintech lending is thus poised to grow exponentially and establish itself as a mainstream platform over the coming decade.

Tags: BankingFintech
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