Technology is changing the way we do everything. We shop online with Amazon and other internet vendors. We find vacation accommodations from alternative hosts online with Airbnb. We ride share with Lyft and Uber instead of using taxi services. Finally, technology is updating and changing the way we manage our finances. FinTech is in the category of businesses that uses innovative technology to operate in the financial services world. While several FinTech companies are working to support traditional financial services, others are going into direct competition with banks, and they have a good chance of winning. Here’s why.
A recent Goldman Sachs study predicted that FinTech alternative lenders could take $4.7 trillion in business away from traditional banks because the FinTech lenders are easier to use and have fewer associated fees. An organization called Lending Club helps borrowers connect with investors. The difference is that the investors are a group of normal people who want more than the half-percent of interest that traditional banks are offering on savings. Additionally, FinTech businesses are able to offer loans without the rigmarole that traditional banks inflict on their customers, making borrowing, transferring of funds, and personal financial management easier for the customer.
FinTech utilizes data and innovative technology to offer lending services to people interested in personal loans. FinTech companies have also taken advantage of the bloated regulation on prime and near prime collateral-based lending. For example, people looking for mortgages or home equity loans face a raft of burdensome regulations and policies that traditional lenders are required to adhere to when making loans. FinTech is thriving in this field now because fewer potential borrowers are eligible for traditional lending. A recent TransUnion study indicated that nearly 92 million American consumers have transferred to FinTech companies for personal loans because it is easier to get a loan, and they don’t feel as if they are being put through a background check akin to government clearance just to borrow $10,000.
FinTech alternative lenders are actually lending more money than traditional banks and credit unions. FinTech lending increased 122 percent in 2015. As mentioned, following the financial crisis of 2008, the Consumer Financial Protection Bureau and the government introduced significant changes to the rules and regulations around lending to ensure that banks thoroughly check an applicant’s “ability to repay” before making a loan. Now, America is the land of opportunity and home to many entrepreneurs and self-employed individuals. The policies and procedures adopted by traditional lenders make it virtually impossible for people who do not have traditional income streams to prove their ability to repay. The restrictive income verification process not only excludes people with alternative income sources but often makes them feel that the banks don’t actually want to do business with them. And now, with the rise of FinTech, these smart and ambitious people don’t have to put up with the burdensome regulations embraced by traditional banks’ risk departments.
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