For many years, banks used to be the go-to solution for money lending, but their notoriously strict acceptance criteria and bad customer service pushed individuals and businesses alike in search of other more flexible providers. And again, for many years, there were no proper alternatives to banks, as options such as payday loans, car title loans or casino loans caused more issues than they solved. That was until finance technology came along.
At the time of the economic recession, when most banks were busy making cuts, closing down branches and struggling to adapt to the new market, technology was booming. And if banks couldn’t focus on those new technologies, many startups took advantage of the opportunity and created new revolutionary services that merged finance and technology. It all started as a trend that later developed to become Fintech, one of the fastest growing and most disruptive fields.
Now, Fintech is recognized for being a gamechanger in the loan industry and for how it has given clients more flexibility. Thanks to revolutionary technologies, loan providers have made it faster and easier than ever before to find a lending solution that works, while at the same time removing the burdens of paperwork and long approval times.
Peer-to-peer lending platforms
When Zopa was founded in 2005 in the UK, few people realized just how much peer-to-peer lending would change the finance field, but over the years Zopa was followed by many other similar platforms in the U.S., Germany and Canada. Now, peer-to-peer lending technology allows regular individuals to lend money to other people in need in a secure and verified online environment. In this method of debt financing, there is no official financial institution acting as an intermediary. Instead, investors can look at a list of users who need a loan and choose to pay all or part of that loan with an agreed upon interest rate. This system benefits lenders, who often look at peer-to-peer lending as a form of investment, as well as borrowers, who find much needed financial support even if they have a bad credit score.
Data-driven risk assessment for individuals and businesses
Through their very nature, loans involve a certain degree of risk and it’s crucial for loan providers to assess this risk in order to avoid losses. However, unlike banks, whose risk assessment methodologies are often incomplete, inaccurate, biased or unjust, online lenders take advantage of big data tools to take into consideration a variety of factors. In the past, it was commonplace for individuals and entrepreneurs to give up their dreams because the bank rejected their loan. Now, thanks to big data, the loan industry is being reshaped. Providers no longer look just at the credit score to determine who should or shouldn’t get a loan, because this score doesn’t always represent how fiscally responsible a person is. Data-driven risk assessment, on the other hand, allows loan providers to see a fuller picture. Sophisticated algorithms can identify spending patterns based on data from various sources to determine whether or not an applicant is high risk. Individuals obviously benefit from this improvement, but it’s perhaps small business owners who welcome the change, because banks are usually quite skeptical of trusting startups.
Quick and easy application process
Apart from the fact that big data allows more people to obtain loans, it also has another indirect benefit: quicker application and approval times. Prior to online loans, people who needed financial help had to personally go to the bank’s physical location, wait in line, pick up an application form, fill it in, submit it, wait an indeterminate time to get the response, and then do the same again with another bank, which was obviously a huge impediment. Now, applicants needn’t go through all this hassle, because some providers approve loans within minutes. Platforms such as smarter.loans curate the most reliable loan providers, users choose the right one for them based on side-by-side comparison and, once they submit the online application, the response rarely takes more than 24hrs to arrive. Thanks to big data, loans are approved faster and applicants get the influx of cash they need in due time, which stops them from resorting to unreliable lenders, also known as loan sharks.
Last, but not least, there is the matter of customer support and customer interaction, which may not seem major, but it’s actually a major decisive factor. The modern applicant doesn’t have time to visit several banks at their physical locations to ask about a loan and online providers understand this. Now, thanks to AI-powered chatbots, they don’t have to either. Because artificial intelligence has advanced so much in the past decade, chatbots can answer most client questions as accurately as bank representatives, so people who want a loan no longer need to leave their houses. Does this mean that AI will steal jobs? Not at all. According to a report conducted by Juniper, chatbots will lead to annual savings of $8 billion by 2025, because the personnel that would normally deal with customer service can focus on other tasks instead. Experts also estimate that, by next year, an impressive 85% of customer interactions will be handled by chatbots. This is an innovation pioneered by online lenders, but banks have started to incorporate it into their service portfolio as well, and success rates have been high.