As recently as 2015, people could get a loan from a traditional bank only. Unfortunately, not everyone had the opportunity to get it because many had no credit history or a stable job.
But nowadays, the situation has changed thanks to online platforms, automated services, and mobile apps. This allows people to get a loan easily and quickly now.
Problems with Traditional Bank Lending
The lending system in traditional banks is very inconvenient for customers. Banks necessarily check your credit history, require stable employment, or collateral. Therefore, most people have a high chance of getting rejected.
About 15% of Americans are partially served by banks, and 6% have no bank account, according to the 2022 Federal Reserve data. Lending is almost unavailable to such people.
The size of the loans also matters. Often, it’s not profitable for banks to issue small loans like $100 or $300, because the verification and paperwork costs much more. So, lots of people are left without support.
Global Impact of Fintech Innovations
Fintech innovations spread far from the USA and more and more every day. It is becoming a major tool for credit access worldwide.
In 2011, only 51% of adults all over the world had access to financial services, but today it is over 76%. This growth was due to using mobile banking (fintech platforms).
Global fintech lending volume has reached $223 billion, with an additional $572 billion from tech-based companies, according to the Bank for International Settlements. This shows us the scale and global impact of financial technologies.
Forecasts suggest that by 2030, the USA lending market will exceed $700 billion. Similar trends are seen in the other regions, where digital services are becoming a tool for economic growth for small businesses and households in Asia, Africa, and Latin America.
A great example of how fintech is changing practices is microloans through automated platforms. It lets people get funds quickly with clear terms and without hard checks. This is especially important for those who are often rejected by traditional banks. Fintech companies help to create a fairer financial system where everyone can rely on support.
How Fintech Companies Work
Fintech companies operate much simply than traditional banks, and it is more convenient for users. They work online without any physical offices, they do not require paper forms, and they use AI technology for quick and soft information checks.
Fintech services usually analyse the following:
- Stable income
- Bill payments
- Rent payment history
One of the biggest changes that fintech has made is an opportunity for people to make a credit history from scratch. Thanks to small, regular payments for utilities, phone, or online purchases, people can prove their reliability.
Fintech has made it possible to get a loan in places where traditional banks do not even reach. Lots of services that are working through mobile apps became extremely popular because of people who use only a smartphone for all financial operations. Many entrepreneurs can’t get a loan from a traditional bank because they don’t have a stable income. So they also benefit from fintech progress.
One more interesting thing that fintech brought is that loans appear right inside the everyday services people already use. For example, in Kenya, there is a service that gives small loans for buying a smartphone. Every day or month, a person pays a small amount through mobile money, and when the company sees that the person pays regularly, it can offer another small loan.
The same thing happens in Latin America. The platform can see people’s financial activity and offer a small loan.
Benefits of fintech lending
Fintech lending services improve the credit market by enabling faster and more convenient transactions. Here are their key advanges:
Accessibility
Unlike traditional banks, fintech services can give people loans without a formal credit history.
Transparency
Customers can see all terms, interest rates, and total costs. Users of fintech services often say that they clearly understand all of the loan conditions, unlike users of traditional banks do not.
Popularity
Trust in such services is growing rapidly. Statistics show that fintech companies provide about 63% of all personal loans now.
According to the Federal Reserve, the total loan volume reached $356 billion in the USA in 2022. And about 14% of that (it is around $50 billion) was issued through fintech platforms.
Speed
In traditional banks, the approval can take about a week, but fintech services process loan applications in minutes.
The Negative Side and Possible Risks of Fintech
Despite many advantages, these innovations also have downsides and risks, such as:
High interest rates
Fintech companies often set higher rates than banks because of the risks of non-payment. Sometimes the annual rate can reach 36-100%, while the bank’s average is around 12%.
Data security
FinTech services operate fully online and process a lot of personal information from ID data to transaction history. Any data breach can have serious consequences. In 2022, Block’s Cash App reported a data leak, which affected about 8.2 million users. Then Americans lost over $10 billion.
Different financial laws in the USA
Lending regulations in the USA vary by state. For example, in California, the maximum rate for loans is 36%, while in Texas, companies can legally charge over 100%. To operate in several states, some companies partner with federally licensed banks. This helps expand credit access but also creates loopholes that dishonest lenders might use.
Risk of a high debt
Fintech made the borrowing process very easy; because of that, some people take loans too often, without enough financial knowledge. Lots of borrowers take new loans to pay off old ones.
Service depends on technologies.
A system glitch can block a client’s access to funds. Also, fintech companies heavily rely on a stable Internet and artificial intelligence.