Fintech, the moniker for the financial technology market, has disrupted several markets in the financial services sector. The obvious one is the payments market, which is basically the digital transfer of money from one place to another. However, trying to describe fintech to a professional in those few words would be basic and probably not worth the time.
To dissect fintech deeper, one needs to look at the key markets it has helped to change the landscape of. One could talk about the stock market, the insurance industry, or even the real estate market. Fintech has influenced these markets in their own unique ways. But this write-up will discuss how fintech has changed the credit market landscape.
The Crisis that Rattled the Credit Market
The traditional credit market is composed of three major players; there is the lender, the borrower, and the regulator. The regulator ensures that the lender and the borrower adhere to a certain set of rules. This has become particularly important since the global financial crises of 2008 to 2009. The Basel III rules were introduced for banks in Europe as was the Volcker Rule in the U.S., while stringent credit score measures were put in place to make sure that consumers can only borrow what they can afford to pay.
These measures locked many people off from accessing the mainstream lending market, while the few that managed to get in did so under very strict conditions. Some lenders require consumers to provide collateral for the loan before receiving the money while others charge exorbitant interest rates on loans to those whose credit ratings are low.
How Fintech Is Changing the Landscape
Things have changed over the last 5-7 years following the emergence of several peer-to-peer lending platforms. Technological advances have continued to revolutionise the financial services sector over the years, and after the emergence of online payments platforms like PayPal in the early 2000s, startups have gone a notch higher to try to disrupt the related markets.
The peer-to-peer lending market has emerged as one of the preferred destinations for borrowers looking to get loans at flexible rates. This market attracts consumers that want to service existing loans at lower interest rates as well as those that want to consolidate existing loans into a single credit product. Over the last couple of years, these platforms, which include the likes of LendingClub and Zopa, have also started issuing auto loans and business loans to small and medium-sized businesses.
Several other startups targeting the same space have also cropped up. Some of them operate in the payday lending market, but this still lies within the grand scheme of things in the peer-to-peer lending market. The interesting bit about the payday lending side of the credit market is that here, the rules are a little bit different. Some of these platforms lend money to consumers without the due regard to their credits scores, thereby allowing them to repeatedly consolidate and service existing loans with new loans and at higher rates. Reports indicate that several consumers who go chasing payday consolidation loans have found themselves held hostage in a cycle of debt, which continues to wreck their credit scores.
And as experts continue to warn against rushing to get loans from lenders that do not care about credit scores, very few borrowers are taking note. This can be pointed out as one of the adverse effects of the advances in the fintech market. The barriers to entry are low and some players have chosen to completely bypass the proper due process.
Ideally, peer-to-peer lending platforms connect two parties via a single interface. The first party is the investor who provides the funds while the other party is the borrower. The investor’s interests are matched with those of the borrower and then the access to funds is provided. The investors can also peruse through a list of loan requests that are accompanied by the credit profiles of each borrower to determine who to lend the money to depending on their requirements.
The borrowers have a similar interface where they can access lending options and choose the ones that align with their budgets. This practice of linking the investor directly to the borrower has changed the rulebook of the lending market significantly.
In traditional lending, mainstream lending institutions like banks use bank deposits from customers to issue as loans to other customers. In peer-to-peer lending, there is no deposit-taking and this aspect has forced some banks to re-think their approach to the market. Some have relaxed their lending policies to try to lure back customers who have found the alternative lending market interesting while others have taken a keen interest in the fintech market. They are now investing millions to try to ward off the threat from startups like Zopa and LendingClub.
Fintech has revolutionised the credit market through peer-to-peer lending. There are also several alternative lending platforms that allow borrowers to access loans quicker regardless of their credit scores. This aspect has brought with it a few challenges while at the same time helping to bring more people to the credit market.
Those who couldn’t access loans from mainstream lending institutions like banks now have access because of peer-to-peer lending platforms. This has also triggered a major shift in strategy among mainstream lending institutions with some investing heavily in fintech.
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