Fintech has capitalized on the relationships that can be formed between finance and technology to drive innovation for everyone from businesses to everyday consumers. Whether it is having the capability to access a bank account on a tablet or paying for an in-store product with a mobile phone, these ties formed between finance and technology are the epitome of fintech.
The so-called fintech industry is targeting a treasure chest of over $4.7 trillion once dominated by old school players. The sector drew $12 billion investor dollars in 2014, an over 40 percent increase from the previous year.
Within the retail financial sector, small business lending, personal loans and loans for professionals have already been radically improved by the growth of fintech. This is not just speculation about the future – every day small business owners are taking advantage of the new world of lending powered by the fintech revolution.
Fintech vs. Traditional Lending
The fintech revolution has the traditional institutions very concerned. Jamie Dimon, JPMorgan Chase’s CEO, warned in his investor letter that “Silicon Valley is coming.” Jim Marous wrote in The Financial Brand:
The impact of digital technology and the digital consumer is transforming the way consumers access financial products and services. Beyond simple transactions, such as checking balances, the intersection of finance and technology (fintech) is impacting virtually all categories of financial services at an increasing rate, reshaping the industry’s status quo.
Backing up his contention, Marous cited results from a PwC survey, Blurred Lines: How FinTech is Shaping Financial Services, that found the majority of survey participants see consumer banking and fund transfer and payments as the sectors most likely to be affected over the next five years. The report included responses from 544 CEOs, Heads of Innovation, CIOs and top management involved in digital and technological transformation across the financial services industry in 46 countries.
An Analysis of the New Lending Industry
Fintech has accelerated the growth of the small business lending sector in multiple ways. First, and perhaps most critically, fintech has lowered the cost of loans for the lender. These savings can then be passed down to the borrower, creating a less-expensive product. Lending costs have been slashed by cutting out physical branches, legacy IT systems and burdensome regulations, allowing a more direct connection with the borrower.
Also, by moving the application process to the internet, additional costs can be cut from physical paper application processing. For example, the standard loan cost for a traditional lending institution is 5-7 percent. Fintech lenders can cut this number down into the 2 percent zone.
Next, fintech has opened up an entirely new clientele for business lenders. Due to a lack of pertinent data and ways of processing it, traditional small business lenders are forced to rely on the old fashion ways of approving borrowers. This approval process takes into account credit score of the business and owner as well as the collateral to secure the loan.
The new fintech small business lending firms consider hundreds of data points, often in real time, to make credit decisions. This practical use of big data enables the new wave of fintech small business lenders to approve loans that were previously impossible by traditional means.
As you can see, fintech has revolutionized the financial industry and online business lending in particular. Although fintech remains a tiny part of the overall financial sector, it is rapidly growing. Using big data and high-speed processing computers, fintech firms can make loans that were once considered impossible by traditional lending institutions. In the process, fintech is super-charging the small business lending world with growth and new possibilities.
Excel Capital Management is a full service boutique funding institution with a wide array of funding options available for small to mid-sized businesses throughout the U.S. and Canada. Learn more at excelcapmanagement.com.