Fintech Lending Explained

Financial technology (aka “fintech”), as an industry, exists to improve and automate the delivery and use of financial services. The fintech industry is focused on enhancing and automating financial services through innovative technology. Lending and credit products are a rapidly growing area within fintech, as new technologies enable faster and more intelligent loan and credit offerings compared to traditional banks. Moreover, startups are scaling with new products and they’re doing it faster than ever before. Fintech lending is also able to serve niche and underserved markets, while allowing borrowers to apply for financing from anywhere in the world. This post will delve into what fintech lending is and its impact on the lending industry.

The Lending Process Before Fintech

The loan industry has existed for a long time and has, at this point, a well-defined process. This process consists of four steps: 

• Application
• Approval 
• Payments and Repayments
• Collections

The first step in the lending process is the application. The borrower fills out an application form, either in person, by phone, or online, providing personal and financial information. The lender will review the application and determine whether or not to move forward with the loan.

If the loan application is approved, the borrower will receive a loan agreement that outlines the terms and conditions of the loan, including the interest rate, repayment period, and any fees associated with the loan.

Once the borrower accepts the loan agreement, the funds are disbursed. This may happen immediately in the case of some digital lenders or take a few days for traditional banks.

Repayments of the loan will usually begin after a set period of time, known as the grace period, and continue until the loan is fully paid off. The borrower is responsible for making payments on time and in full to avoid late fees, penalty interest rates, and other negative consequences.

In case of a default or missed payments, lenders may initiate collections, which is the process of trying to recover the outstanding debt. This process may involve phone calls, emails, letters, or other forms of communication to the borrower to request payments. If the borrower is unable to pay the debt, legal action may be taken.

Fintech Lending Explained

The fintech industry aims to enhance and automate the delivery and use of financial services through innovative technologies. One of the fastest-growing areas in fintech is lending and credit products. Fintech lending leverages these new technologies to offer loans and lines of credit faster and more efficiently than traditional banks. Honestly, it’s easier than ever to build a credit startup with the right framework.

Additionally, fintech facilitates loans to niche and underserved markets. It’s estimated that more than 1.4 billion people are currently unbanked. This is where we found our niche with Stilt, which offered loans to immigrants and visa holders in the US. These populations were historically underbanked and underserved by traditional institutions, but fintech’s new technologies have made it possible to create a digital loan product specifically tailored to their unique needs using alternative data.

Furthermore, fintech lending’s focus has enhanced accessibility and reduced costs like never before, making it easier than ever before for borrowers to apply for financing from anywhere in the world. In this post, we will delve into fintech lending and its impact on the lending industry.

Improving the Lending Process Through Digitization

The digitization of the lending process relies on lenders’ capability to access and utilize digital data, resulting in faster, automated, and precise underwriting decisions made entirely within the digital realm. These advancements have significantly enhanced the lending process, making each step smoother than ever before. These steps include applications, approvals, payments and repayments, and collections. In this article, we will explore how digitization has transformed each of these components of lending.

Applications

In the past, borrowers had to apply for loans in person at a bank branch before the advent of fintech lending. Nowadays, borrowers can easily access a lender’s online application and complete it within minutes. This wider access to streamlined loan applications has not only improved the overall customer experience but has also unlocked a virtually limitless potential for loan volume. In theory, anyone from anywhere in the world can apply for a loan at any time.

Approvals

To handle the potential for unlimited loan volume, digital lenders have adopted automated solutions and alternative data sources to evaluate would-be borrowers and make remote credit decisions. Stilt, for instance, lends to visa holders and uses alternative data, such as education, employment, and earning potential, to determine creditworthiness since credit history is often lacking in this market. Once an application is submitted, automated systems review the borrower’s data against the lender’s criteria, and loans are approved or rejected based on risk models. Previously a manual task, further technological advancements have allowed underwriting review to be automated, and most fintech lenders now use automated APIs like Onbo for this purpose. Once approved, loans can be accepted digitally and funds disbursed automatically in minutes, greatly improving the customer experience.

Payments and Repayments

The impact of digital lending extends beyond the application, approval, and disbursement of loans; it has also revolutionized payment and repayment methods. Digital lending is now omnichannel, providing borrowers with various payment options through different digital channels such as online bank accounts, e-commerce accounts, and mobile wallets. This has led to increased efficiency and decreased fraud, as user histories are more transparent and borrowers can access loan funds immediately. Additionally, borrowers now have a plethora of repayment options to choose from, making repayment more diversified and accessible for everyone.

Collections

The digitization of lending has not only enhanced the loan and repayment processes but has also optimized the less glamorous aspect of collections. Traditionally, lenders used third-party agencies to contact delinquent borrowers over the phone. However, with the widespread use of mobile devices and laptops, digital strategies have been adopted to connect with customers online. With digital lending, lenders can leverage automation to expedite the debt collection process and reach a larger number of delinquent borrowers in less time. This approach has led to higher success rates in getting borrowers back on track.

So What Does it All Mean for the Future? 

It’s hard to say, but we can speculate about some of the trends and where they’re trending toward. 

What sets aside this new wave of digitally-focused lenders from banks and older financial institutions is an emphasis on investment in technology. This will continue and the pace will likely increase. 

For the banks and older financial institutions, this investment is essential. They will need to prioritize retrofitting newer digital infrastructure just to keep pace. This will be a continuous effort, however, as the technology will continue to grow and improve. In many cases, it will also require these companies to partner with some of the emerging fintechs that are directly and indirectly competing with them. 

The newer startups and organizations that have been built on the digital infrastructure and that are building the better versions of it will, on the other hand, prosper, especially the ones that keep a close on their key metrics. They will create technology that offers smoother applications, faster approvals, quicker disbursements, and evermore channels for repayment, all while better complying with the rules and regulations. 

Simply put – fintech lenders will continue to embrace all that digital lending has to offer and thrive by doing so.

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.

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