Rapid advancement of technology and a new breed of entrepreneurs with keen interest and understanding of finance, have brought about fintech. One more important aspect that has boosted innovation in this industry is the thought of improving customer experience and catering to various borrower pain-points. These were rarely serviced by traditional banks. The gaps observed by fintech pioneers led to an ever-expanding lending market catering to the specific needs of smaller borrowers.
Right from insurance underwriting, easy processes of opening new accounts online, to credit profiling using unconventional methods, fintech is revolutionising the world of finance, one innovation at a time. Here’s a look at the top 10 innovations in this industry.
This is the best example of a win-win situation for both lenders and borrowers using a tech platform. Peer-to-peer lending allows borrowers access financing options from multiple individuals. The process of getting the loan is simpler as compared to that in traditional banks. Lenders on these platforms are usually investors who are looking at parking their savings and investments in a place that provides better returns as compared to interest rates offered in traditional debt markets. The platform takes on the task of vetting and pre-approving the borrowers, thereby offering lenders an easy way to find the right borrower for them.
Peer-to-Business (P2B) lending works on the same model. In this case, individual borrowers are replaced by businesses who borrow from a group of lenders on the platform. These lending platforms, essentially, match the requirements of borrowers with lenders and charge a fee on the borrower’s repayment.
The traditional method of credit scoring would not qualify small businesses and self-employed individuals for loans. Their strict and outdated criteria for credit scoring would only qualify either big, established companies for loans, or individuals with fixed income jobs, who could procure a salary slip to furnish to support their loan application. Therefore, it was becoming increasingly difficult for small business owners and SMEs to secure funding based on traditional methods of credit scoring.
The fintech industry acknowledged this need of a more flexible and qualitative scoring that could allow a proper analysis of credit scores in these cases using alternative data points, such as, percentile credit scoring against similar borrowers. Social signals are yet another innovative parameter used to provide flexible credit scoring. These factors coupled with deep learning algorithms have led to better lending decisions for fintech, over time.
These methods of credit scoring have brought down cost of underwriting loans as well, which helps fintech pass on the price benefit to borrowers thereby expanding their customer base.
In the age of Big Data and IoT, it is expected that tech companies will work towards gathering as much data as possible to oil their functions and subsequent expansions. After all, it is through studying historical data and creating forecasts based on them that companies can formulate new strategies and innovate better products. Data gives fintech companies valuable insights into what customers truly need. Fintech companies gather such data through free digital products like expense management apps. These apps collect useful data on a customer’s potential to pay premiums, buy mutual funds, or invest in real estate. Companies exchange these data and insights to third-party financial products and earn commission on the sales.
Small ticket loans are generally not entertained by traditional banks due to the low margins on them and high underwriting costs. Consumers who want to buy big ticket items and high-priced white goods, generally find it difficult to fund their purchase due to this reason. Fintech lending companies have identified this requirement and now serve borrowers through BNPL offerings. These ‘Buy Now and Pay Later’ funds let consumers buy products with a click of a button, without needing to fill extensive loan documents or wait for approvals. What’s better is that these loans are underwritten at 0% and with an option to pay via instalments.
Fintech companies offering these funding solutions provide this customer data to Original Equipment Manufacturers (OEMs) who stand to gain the most from the increased affordability of their goods. Customer data when sieved through machine-learning and deep-learning algorithm, provide OEMs with insights that allow them to launch highly-customised offerings in the market. Hence, the 0% interest component offered by these fintech lenders is covered by the OEMs who buy the information from them.
Faulty premium calculations have become a norm in traditional insurance underwriting. In these cases, people of the same age, height and weight, and teetotallers will be assigned the same insurance premiums. However, the premiums don’t take other qualitative factors into account such as the health routine and exercise patterns of these individuals. Two insurance applicants with the same aforementioned characteristics could be assigned different premiums based on more qualitative aspects of their health.
For example, one could be a fitness enthusiast while the other could be a junk-eating couch potato. Needless to say, health concerns would be more drastic and severe for the latter.
Alternative insurance underwriting takes these fine differences into account by gathering data based on medical history, lifestyle, and social signals. This helps them eliminate normalisation in actuarial term that provide flawed results to traditional underwriting methods. This data combined with algorithms and analytics help fintech offering insurance products provide highly customised insurance premiums to their applicants along with alternative payment options based on their specific needs and qualification.
The step beyond paper and plastic money; the digital wallet has revolutionised payments across the world. These wallets work as both a ‘no-frills’ bank and also as a payment gateway. This system lets consumers load some amount of virtual cash to their digital wallets and use it for both online and offline transactions where merchants do accept payments through digital wallets.
Digital wallets are designed to provide payment convenience to consumers. They earn their revenue through a small fee that is charged to the merchants. The end-users of wallets are generally consumers and stores that sell their products and services to these consumers.
Taking the digital route to traditional banking is digital banking. Digital banks are marked by the complete digital presence sans any physical headquarter or branches. They work exactly like traditional banks do but are no-frill service providers with an end-to-end digital infrastructure. The monetary benefit they receive by not investing in manpower and real estate is passed on to their customers and is a major winning point for both digital banks and their customer base.
With the rise in e-commerce the need to have secure payment gateways has increased manifold for merchant sites. Payment gateways enable consumers to pay through multiple payment modes while shopping on e-commerce sites. Shoppers can pay through debit and credit cards, cryptocurrencies, and digital wallets. Traditional banks generally charge large fee to process transactions using any of these alternative methods of payment, which is not really feasible for merchants.
Fintech companies used technology here to integrate various payment methods into user-friendly apps and payment gateways that can be easily integrated into their websites.
Fintech-based asset management enables investors to build portfolios by buying stocks and mutual funds without paying a commission fee. Although the asset that they buy are priced slightly higher than the actual asset price, yet the amount of savings they end up with by not paying commission fees, makes the investment worthwhile and the asset price positive.
Asset management companies can make this happen by collecting investor data in exchange of waiving off the commission fee. They share this data with high-frequency traders who are capable of influencing asset prices.
The last but not the least of the top 10 innovative fintech solutions is digital insurance. As the name suggests digital insurance is largely based on digital infrastructure and quicker underwriting processes. Alternative insurance underwriting has enabled these fintech insurance companies to provide better and cheaper coverage for home and life insurances while pricing premiums at variable rates depending on qualitative rather than quantitative factors. This has also led to the creation of multiple business possibilities for the fintech insurance sector.
With their multiple funding options and solutions and many more innovations on the way, the fintech industry is just beginning to make its mark in the financial services market. By challenging traditional methods of funding and providing bespoke solutions while meeting their revenue requirements through innovative methods, this industry has surely found its niche combining the two behemoths of finance and technology.