“Quick Loans” and “Easy Repayment Options” are relatively new terms in the finance and banking industry. Baby boomers and the generations preceding them would agree to the fact that availing loans were not quite the cakewalk it has become today.
Traditional banking has existed ever since the first sign of civilization. There were transactions and there was credit available, even back then. However, the way the lending model evolved was much slower than it should have, given the increase in business and transactions over the years.
Small businesses started mushrooming globally as more microentrepreneurs started filling the market. They observed gaps in demand and supply of certain products and services, and they started focusing on sealing that gap, locally, to the extent their business capacity could handle.
But what happened when this micro-entrepreneur planned to expand their business by say hiring a team, allocating marketing budgets, or buying a new piece of machinery to increase business efficiency? They needed to find out new channels of borrowing money every time they needed to fulfill any of the above-mentioned purposes.
Traditional banks seldom entertain loan requests from small businesses, let alone micro-enterprises. The cost incurred in underwriting the loan and the extensive paperwork would eat into any margins they would otherwise have received. As such, indulging in small business loans has never been a lucrative business opportunity for the commercial banking sector.
Unfortunately, ever since the 2008-subprime crisis, the banking sector became even more averse to lending to small businesses due to their low creditworthiness as compared to larger corporations with more asset-backing.
However, all this would change rather rapidly in a decade’s time. There started a shift in thinking, recognizing the importance of the small and medium business (SMB) and microbusiness sector which along with the advent of fintech, led to small businesses having access and options to a larger number of loan instruments than they had before.
Fintech is evolving at a rapid rate. With every Artificial Intelligence (AI) and Machine Learning (ML) integration, it is bridging gaps between lenders and businesses. The term new-age business mainly refers to SMB and microbusinesses, that are gaining exponentially from the varied financing options fintech has to offer.
Fintech companies are capable of providing quick loans to small businesses at attractive rates of interest and easy repayment options and this is how they have been able to achieve that:
Data is gold in the current date. The more specific data companies have regarding what the market is seeking, the better they can customize solutions for them, which is truly going to help the end consumer, small businesses in this case. Big Data has brought the idea of data collection to a new level. It has enabled lenders to understand the benefits of perfect information to fuel gaps that had existed in the market earlier. Especially when it came to microbusinesses. With complete information in each profile, powered with machine learning and predictive analysis, fintech lenders can now ascertain the creditworthiness of small business applicants in a more foolproof way as compared to their traditional counterparts. This gives them access to a larger market that would have been impossible otherwise.
Also, by using automated underwriting methods that use this perfect information to ascertain creditworthiness, fintech lenders have been able to reduce the cost of loan origination thereby passing on the benefit to small business owners in the form of better, more customized loan plans and interest rates.
However, perfect information might not be as perfect as it fails to capture the more qualitative aspects of the borrower which might define them better as a business owner. Or, data collection might not have a way to capture data regarding the personality traits of the business owner, which could be crucial information in determining his/her creditworthiness. Apart from these few anomalies, data collection and analysis these days have been accurate enough for fintech lending companies to speed up processes and fund businesses in need.
There are of course cases in which the borrower might not have a good credit rating which would make it difficult for him to secure even a personal loan to boost his business. Fintech lenders might use the information that they have at hand and use their tech tools to create a loan plan which is much more suitable for businesses with poor credit ratings. As such, almost all businesses have a shot at securing loans to help build on and expand their business.
In short, fintech has been helping match lenders to borrowers using data and the risk appetite each has, which has helped businesses secure loans much more easily.
Fintech has made loan origination, application, and repayment easy. It has reduced paperwork manifold by making the data collection process an online one instead of lengthy paperwork. Fintech lending companies offer businesses easy to fill out forms using Application Programming Interfaces (APIs).
This has streamlined the overall data collection process and reduced over a day’s worth of paperwork to a few minutes spent to fill up an online application, response to which is equally quick. Small businesses have been positively impacted by this change as they are usually strapped for both money and time. Most micro-businesses are run by solopreneurs who are usually a one-person team. They could have a team of up to 5 members but as the owner, they need to be at the top of everything that is going on. In this situation, spending days and weeks locked up in a loan application process affects their business’ efficiency significantly.
Combine the time lost by one solopreneur with that of multiple others who are losing time in lengthy paperwork requesting funding brings us to a staggering amount of efficient and able manhours lost. Fintech has helped do away with this severe loss by making loan application and origination an easier and quicker matter than before.
While easy access to funds is an important aspect of fintech lending so is transparency and the ability to choose the right funding option for your business. Various aggregation services platforms are helping small business owners compare the loan options they have at their disposal including interest rate comparison and terms and conditions spelled out in plain English. This helps them understand every related aspect such as loan approval and pricing. This has made easier for small business owners to choose funding options more responsibly and with better understanding.
Apart from helping small business owners access easy credits, fintech companies have also helped them gain access to something truly precious to helping them increase their revenues, and that is data.
Consumer behavior-related data is extremely important for business, big or small. It helps them understand their consumers’ buying patterns and also helps them predict buying behavior.
Fintech companies often provide payment services such as mobile wallets, online payment platforms, and tools to track income and expenditure. Most of the time, these apps and platforms are free to use. In exchange, the company might ask the consumer to furnish some details about their purchase habits and some more non-personal information, that helps them understand the buying habits of a particular person. This information is truly beneficial for businesses that can then create customized products and services to meet the needs of the particular segment of the market which would otherwise have gone unserved.
It also helps target and market certain products to a certain target audience instead of blanket marketing which would cost businesses more and fetch lower ROI.
In today’s market which is primarily driven by customization, fintech is playing a major role in making it possible for both fintech lenders and small businesses to respond with better products to their end consumers. Looking at the pace at which fintech has been evolving, it is safe to say that the year 2020 will be a special year for fintech innovations which is going to reshape businesses further.