Financial technology (Fintech) and the internet have enabled the creation of online loan marketplaces. Marketplace lending is made possible by technology platforms that use scoring algorithms to determine the borrowers’ ability to repay.
Online loan platforms were first created by non-bank owners who act as brokers, collecting a fee to match borrowers with lenders and offer them multiple loan options to compare. They pose a real threat to the profitability of traditional lenders.
Julian Skan, Accenture Strategy managing director for banking and capital markets, told Forbes: “Banks are mobilizing to take advantage of industry changes, leveraging digital technologies and ecosystem business models to cement their relevance with customers and regain revenue growth.”
Originally referred to as peer-to-peer lending, these offerings were rebranded to online loan marketplaces when hedge funds and industrial investors entered the space.
Major Benefits of Applying for Loans Online
One of the most attractive features of sourcing loans online is the reduced time and paperwork required. Fintech platforms brag that their algorithms can pre-screen borrowers and safely provide them with faster approvals and funding.
They ask for access to borrowers’ ongoing financial data to monitor for their ability to repay. Small businesses can then use the platform’s electronic invoicing, borrow cash on invoiced amounts immediately, and automate monthly payments, among other features.
More Online Lenders Than Ever Before
Fintech online loan platforms have started creating partnerships with banks and credit unions to reach small businesses who aren’t as comfortable dealing entirely online. Traditional lenders are eager to jump on the Fintech bandwagon to avoid being made obsolete.
With so many options, how to choose where to apply for a loan online gets complicated. Even Google first provided venture funding that later partnered with LendingClub to offer better terms for Google Partners. This allows Google to invest in the growth of its partners.
As a small business owner, will you consider online lenders to finance your business? The convenience of banking online is attractive to many who want to bank from anywhere. Online lender Kabbage says 17% of their loans have been accessed through mobile.
A poll Small Business Trends did in December 2017 showed that Online Loan Marketplaces were the go-to small business funding source for 13% of respondents. Others are hesitant to complete loan applications online.
The hybrid 15 minute application with a local personal funding manager of Lendio franchises can overcome that reluctance. They loaned $16 million to over 500 small businesses in only 18 months.
Uncertainties Surrounding Fintech and Online Borrowing
The United States lags behind Europe because there is no regulatory framework currently in place at the federal level. Fintech currently has to deal with multiple federal entities and each state.
In the U.S. Department of the Treasury Executive Order 13772 on Core Principles for Regulating the United States Financial System, Fintech is discussed at length. They recommend that the IRS enable “faster, more reliable income verification” to “facilitate lender’s ability to better incorporate historical income data earlier into credit pricing, as opposed to using it for verification purposes at the back-end of the underwriting process.”
They believe that this would lead lenders to approve more loans in the case of moderate credit scores, especially for small businesses. Patterns of small business growth could indicate creditworthiness which could be used to consolidate personal credit card debt into a business loan.
Banks are Embracing Online Loan Marketplaces
In spite of the uncertainties and challenges mentioned above, a 2018 research study of more than 200 banks by the American Bankers Association (ABA) found:
- 71% of banks were interested in partnering with a third-party digital platform for consumer loan origination
- Nearly 80% of banks were interested in using technology to support their small business lending
- 26% of banks were already using online or digital loan origination channels
- 80 percent indicated they would be interested in using technology to support their small business loans business
The ABA feels member banks will offer more small business loans through automation because digital lending makes it more cost efficient.
Interested in learning more? Visit our list of online lenders already operating in the small business lending space.
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