The Reserve Bank of India (RBI) came up with a framework for a regulatory sandbox for Fintech t...
The lending market has seen a definite shift from traditional financial institutions like banks to Fintech companies. These fintech companies provide alternative business lending. Fintech companies have caused a significant change in the process of lending, and it has changed the conventional landscape of lending by using data and technology. In this article, we shall discuss both fintech lending and Conventional Lending.
Fintech is a mixture of two words, namely- Financial and technology. It is a term used for an emerging technology that helps the consumers or financial institutions to deliver financial services in a newer and faster way than what was done through conventional lending. With fintech lending, consumers can apply for the loan from anywhere and anytime, which was not possible earlier. Fintech lending utilizes advanced technology that helps the consumers to take charge of their financial lives.
Conventional lending or traditional lending is a process of granting loan by banks or other financial institutions where the consumers require to be physically present in the bank branches. Conventional lending involves human intervention for the processing of your loan. Conventional lending institutions such as banks have observed the sudden shift in the lending landscape and have begun to adopt some of the methods and alternative credit approaches.
Fintech lending and conventional lending both lend to satisfy its customers’ needs, but both differ in certain aspects. Let’s find out those aspects.
One may be aware of the fact that traditionally, lending involves a process where the customers must approach banks either directly or through brokers to avail the loans. The process of conventional customer boarding is primarily manual and requires paperwork. The traditional onboarding processes at lending companies have a relatively lower rate of loan approvals.
On the flip side, fintech lending companies employ the use of technology to overcome major obstacles when it comes to customer onboarding. Fintech lending companies use multiple ways of engaging new customers like mobile apps thereby increasing the rates of loan applications.
Conventional lending companies harbour a strong relationship with their customers. Therefore the established players retain customer accounts across the spectrum of financial services. The traditional or conventional lenders leverage the convenience of in-person touchpoints at branch offices to strengthen the relationships with their clients. Customer engagements are equally vital for both fintech lending and conventional lending.
Fintech lending companies ensures that the processes revolve around their customers. They strategically target their audience through a medium and in a timely manner. Fintech lending companies give priority to 24*7 access. They use social media as well to connect to their customers or to garner more customers. The use of technologies like Chatbots, which is an AI-based live chat, play a critical role in engaging the customers and supply them with relevant information without any human intervention.
Many traditional lending institutions require the physical presence of customers with hard copies of documents for applying for the loan. The documents are to be submitted at the brick and mortar branches of the lending institutions.
In this aspect fintech lending propagates the paperless approach for loan disbursal. They leverage robust document management tools to manage the customer’s documents digitally. The digitalization of the lending process allows customers to initiate loan applications from anywhere without having to visit a brick and mortar branch. Moreover, the customer’s validation documents can also be scanned digitally, thus, making the lending process less confusing and quicker.
Conventional lenders analyze an applicant’s bank statements from the past and conduct manual verification. The manual management and integration of bank statement data make the loan decision making the process less than fool-proof. The assessment of the loan application is done by analyzing the bank statement application, and then the decision is made whether to approve the loan or reject it.
In case of fintechs, they use machine learning algorithms for risk analytics to facilitate actionable insight from the vast amount of data generated from various sources for lending purposes. With the use of analytics, fintech helps lenders to build parameter to establish and examine likely risky situations in lending. Technology allows real-time portfolio monitoring and performance evaluation to protect lenders assets.
In case of traditional lending institutions, credit bureau data is one of the main vital tools for risk assessment. They use information from various credit bureaus such as Equifax etc. and manually review the report.
In case of fintech, they use intelligent API integration to fetch the credit bureau data. They fetch the data automatically at the time of the onboarding of the customer. Fintech lending companies also rely upon alternative credit scoring to access an applicant’s creditworthiness. Alternative credit scores can be helpful to both fintech lending and Conventional lending for knowing the creditworthiness of an individual.
Conventional lending requires the efficiency of credit manager for executing the underwriting of loans. It may be said that loan underwriting in the conventional lending process depends on the individual skill and the ability of the credit manager.
In Fintech, they use specific underwriting algorithms to analyze different parameters. It helps in the completion of the underwriting process within 24 hours.
Both fintech lending and conventional lending models are followed today, but there has been a significant rise in the use of Fintech lending.
The reason for the growth in fintech lending is as follows: