Advantages of FinTech Lending Over Traditional Banks and Possible Collaboration
By Space Coast Daily // May 17, 2022
By John Brown
In today’s world, technologies that automate and simplify the operation of systems in many sectors of the economy and spheres of life are increasingly coming to the fore. The financial system is no exception, and the concept of “FinTech” unites all innovations in it.
The FinTech market already has a large number of areas. The most popular among them are P2P-lending, E-wallets, Bitcoin, T-commerce, and M-wallets (mobile banking). P2P lending, otherwise known as “peer-to-peer” or “person-to-person” lending, is quite common today. Only individuals without intermediaries participate in the loan issuing process.
Today, it is possible to find online lending platforms, such as GetCash.com, where you securely apply for payday loans and get cash in as little as 24 hours. These lending platforms often work with borrowers of all credit histories, so even those with bad credit can request a loan.
Now, let’s delve into the specificity of FinTech lending and its advantages over traditional banks below.
Characteristics of FinTech Lending
There are four main factors in the development of FinTech:
■ Intensive infrastructure
■ A well-developed legal system
■ A flexible tax system
■ Investment support in the country
How Does FinTech Lending Work?
As you already understood, the critical feature of Fintech lending is the implementation of all operations through a P2P platform that provides direct interaction between borrowers and potential investors. As part of the crowdlending model, all loan requests are placed on the website and undergo initial examination.
Next, organizers of the platform and its experts select investment projects that meet their requirements. They then launch the procedure for the legal registration of their participants (borrowers) to be officially admitted.
The investor (lender) then selects projects via the P2P platform and sends an application for participation in the project to the organizers of the P2P platform.
After this, the contract is drawn up (between the borrower, the lender, and the P2P platform). The contract is certified either with an electronic signature or a written form. A courier then sends it to the organizers of the platform.
Lastly, funds are credited to the borrower, while the crowdlending company charges a fee for the services provided.
P2P platforms use two approaches to pair interested lenders and borrowers: auction and direct.
■ The auction approach is based on the use of an online auction, in which borrowers and lenders, when entering the online platform, indicate the most acceptable interest rates for themselves, depending on the level of risk.
■ The direct approach is a more straightforward and automatic selection of borrowers and lenders at pre-announced market interest rates set on the P2P platform for each risk category of investment projects.
FinTech Companies vs. Banks: Which Is Better?
Traditional banks and FinTech companies both have their weaknesses and strengths.
Banks have significant financial resources and a well-developed customer base. However, some of them aren’t ready to invest time and resources in developing innovative products. In addition, regulators of the financial market closely monitor banks’ activities. Therefore, they can’t always be rebuilt quickly to cater to their customers’ growing needs. For this, there must be an appropriate regulatory framework, but regulators, as a rule, take a conservative position and do not rush to legalize innovation.
On the other hand, the strength of FinTech companies is their innovative potential due to the lack of restrictions from market regulators. Financial services are more personalized. Strategies and business models are customer-oriented, and the design of financial products is based on aggregated personalized values and historical trends, including non-financial, cognitive calculations. Another vital advantage of FinTech is digital trust.
The Possible Collaboration of FinTech and Traditional Banking
The most sensible strategy for both banks and FinTech companies is not to compete but to use various mutually beneficial options for cooperation. Fortunately, both sides have already come to this conclusion. Recent Mastercard surveys show that more than 90% of the world’s banks and 75% of FinTech companies plan on working more closely together in the future.
According to a blitz poll of representatives in the banking sector, 45% of bankers support disclosing non-confidential data to developers.
The majority (58%) said that their bank is ready to implement FinTech innovations, and 71% of bankers believe it is right to monitor and buy effective FinTech solutions. A new study by PricewaterhouseCoopers showed similar conclusions. It surveyed more than 1,300 financial institutions, 82% of which said they plan to start working closely with FinTech companies in the next three to five years.
The cooperation between traditional financial institutions and FinTech companies can have a wide range—from simply using the services of FinTech companies to a full-fledged technology partnership, investing in new systems, or buying existing projects.
The success of many FinTech companies forces traditional banks to change and adapt to new technologies. The largest banks are expanding their range of digital services by increasing investment in technology development or concluding agreements with FinTech companies. Over the past five years, traditional banks and small FinTech companies have realized that collaboration can be the most effective way to grow in the long run. Both have pondered on combining their strengths to operate more effectively.
John is a financial analyst but also a man of different interests. He enjoys writing about money and giving financial tips, but he can also dive into relationships, sports, gaming, and other topics. Lives in New York with his wife and a cat.