Fintech is revolutionizing the lending industry. For many years, getting a loan required heading to a local bank branch, sitting down with a loan officer, and pouring over the details of your financial life. Today, consumers can access loans in seconds with a few taps on their smartphones.
Borrowers no longer need a decade of on-time credit card payments to qualify for a loan. Using AI, big data, secure API connections to banking data, and other technological advancements, lenders can access hundreds of data points about borrowers' financial habits and make informed lending decisions faster. Fintech also powers peer-to-peer (P2P) lending solutions, allowing a retiree in Florida to loan money to a single parent in Germany or a small business owner in Paris.
There are several other benefits we can attribute to the rise in fintech, but first let's discuss what fintech lending is and how it works.
What is fintech lending?
Fintech lending is the use of financial technology, including APIs, to help lenders make faster, more informed lending decisions. This can include using alternative sources of data to weigh lending risk and connecting digital platforms to improve data sharing speed.
Fintech lending empowers traditionally underserved P2P and business borrowers by providing an alternative means of funding and helps improve financial health and freedom. Lenders gain access to more data, allowing them to securely provide capital to a wider range of borrowers.
Moreover, fintech lending reduces the time and the physical barriers to traditional lending. With a fintech lender, a borrower in a rural area can apply and secure funding in minutes without ever setting foot in a physical bank.
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How does fintech lending work?
Fintech lending works by using digital technology tools to help lenders issue loans online through websites or mobile apps.
There are several business models within fintech lending, including peer-to-peer lending, mortgages, business loans, and investor loans. To keep things simple, let’s focus on the four most popular fintech lending models.
In P2P lending, a fintech company connects people or businesses with investors who want to lend them money. In exchange for making the connection, they collect a small fee. Prosper, the first P2P lending marketplace in the United States, uses this model to connect good-credit borrowers with investors and helps process loan applications.
Rather than providing loans themselves, some fintech companies source loans and sell them to investors. Better, the fintech mortgage lending company, is a perfect example of this. Instead of earning a commission on loans, it sources customers who want to take out a mortgage, qualifies them, then sells the mortgages to banks like Wells Fargo or institutions like Fannie Mae.
Much like a typical mortgage broker, Better serves as a bridge between borrowers and investors. However, they’re able to provide these services without charging the same commissions brokers typically charge.
Some fintech companies do provide actual loans. What differentiates them from typical financial institutions is the use of technology to improve the lending process, like Rocket Mortgage. As a pioneer in fully online loan applications, the company has become a leader on the tech side of mortgage lending, focusing on making the process faster and easier while offering competitive rates. Rocket closed $351 billion in mortgages in 2021, making it the leading mortgage lender in the USA.
Some fintech lending companies work to help small businesses access the capital they need to grow. This is crucial, as many small businesses are not eligible for credit from traditional institutions due to a higher perceived risk. Using technology, fintech companies like BlueVine can better assess lending risk and make decisions up to four times faster.
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The differences between fintech lending and traditional lenders
Fintech lending and traditional lending provide the same general service—they lend money to both individuals and businesses. However, the process, tools, and customer experience are different.
While the lending process varies by company, there are five core areas where fintech and traditional lenders differ.
Document collection process: Fintech uses digital tools, such as APIs, to gather documents and digital signatures. Traditional lenders generally use physical paperwork and signatures, which takes longer and may require in-person visits.
Length of time to decision: The use of digital tools allows fintech companies to process loans faster and reach a decision in minutes or days. Traditional lenders can take days or weeks to decide whether to approve a loan.
Access to customer service: Fintech companies often provide support through digital channels like live chat and social media. Traditional lenders tend to offer support by phone or email only during business hours.
How they perform risk assessment: Fintech companies use hundreds of data points to determine risk, including past financial habits, on-time bill payments, and bank balances, while traditional lenders generally focus on credit scores and job history.
Time to fund loans: Fintech lenders can often fund loans on the same day they're applied for, while traditional lenders typically take longer.
The most significant difference between traditional lenders and fintech lenders is access. Fintech lenders have access to more data, allowing them to accurately determine the creditworthiness of applicants and get them through the application and funding process faster.
→ Want to verify borrowers’ income and employment faster? Plaid’s Income APIs provide robust data pulls for employment and income verification in seconds.
What are some examples of fintech lenders?
Some of the top fintech lenders include:
Rocket Mortgage, a fintech mortgage broker.
Prosper, a peer-to-peer lending tool.
SoLo, a peer-to-peer lending platform for short-term loans.
Approve Owl, a tool to help car dealerships verify creditworthiness.
Stilt, a digital lending tool for immigrants and other underserved populations.
YouLend, a lending tool for SME (small to medium enterprise) companies.
Lending Tree, a platform for comparing different loan providers.
Fintech lenders offer a wide range of lending services, including business loans, peer-to-peer lending, and tools to find the best loan for specific situations.
How fintech lending benefits borrowers
Fintech lenders are changing the landscape of the lending market. In addition to increasing competition in the lending space, the fintech model benefits borrowers in several other ways.
1. Does not rely on credit score alone for eligibility
In the past, getting a loan often required a credit score. This limited funding access for some groups, including people with thin credit profiles and new small businesses. Using Plaid Income, lenders can access a range of financial signals, including salary, work history, and net income data. By using an alternative to credit scoring, fintech opens lending opportunities for people without credit history or a lower than average credit score.
2. Faster customer experience
API connections between financial accounts and lenders can speed up processing times, allowing borrowers to gain access to funds faster. This is especially important in peer-to-peer and small business lending, where access to funds could make the difference in keeping the doors open.
For example, fintech auto dealership lending platform Approve Owl uses Plaid’s Assets product to speed up the auto loan application process and help customers get their vehicles faster. It benefits dealerships as well—customers who use Plaid to verify their assets are 50% more likely to complete the buying journey.
3. Democratized financial opportunities
Access to capital has long been leveraged by the wealthy to increase revenue and profits. The innovative technology used by fintech lenders creates opportunities and access that simply didn't exist in the past.
For example, using alternatives to credit scores expands loan eligibility, allowing small businesses and those with limited credit to access funding. Expanded access doesn't just benefit individuals with poor or limited credit—it also helps small business owners and startups that don't have credit scores because they are just starting out.
Approve Owl customers who use Plaid to verify their assets during auto loan applications are 50% more likely to complete the car buying journey.
How fintech lending benefits lenders
Fintech lending isn't just a good thing for borrowers. There are benefits for both sides of the lending coin. Here are two ways fintech benefits lenders.
4. Greater financial transparency
Credit scores aren't the only indication a person can repay a loan. Looking at features other than credit score (or in addition to credit scores) provides a more holistic picture of applicants' ability to pay and helps lenders accurately assess risk. Fintech also provides lenders with direct access to bank data through APIs—which means there are no physical documents to be lost—or altered.
5. An expedited loan approval process
Fintech expedites the loan approval process by reducing paperwork, giving lenders direct access to bank accounts and other financial data, and allowing them to provide faster customer service. Streamlining the application process allows lenders to make more informed loan decisions faster.
Fintech lending expands accessibility and eligibility
Fintech lending’s impact goes beyond creating faster and more secure loans. It also expands access to lending services for previously underserved markets, including those who might not qualify for traditional loans or communities with fewer physical banks. Fintech can also reduce lender risk by providing access to more data and lowering the barrier to entry for organizations offering niche lending services.
While it may take decades to understand the true impact of fintech lending, experts expect it to reduce disparities in financing and provide more opportunities for small businesses.