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Securing a bank loan has never been particularly easy. As bank services have gone online it’s easier than the days when a personal interview with a manager was required, but even a small loan requires quite a bureaucratic process. The customer is credit-scored, their balance is checked, and their recent banking behaviour will be scrutinised before any decision is made on the loan.
As an experience it is not good. A customer asking for a loan at a bank generally finds it quite a stressful experience. They are asking for help and yet the bank is challenging them to prove their ability to repay in addition to making the customer wait for a decision. Some banks manage to offer decisions fairly quickly, on the same-day for example, but I have heard of some government-owned banks that still take up to 90 days to make a lending decision. Imagine waiting for three months to know if you are going to get the money or not?
The wave of financial technology companies has identified loans as a key service where they can offer a much better experience than traditional banks. If a fintech company can offer an immediate decision, instantly transfer the cash, and offer a competitive rate then why would any customer still go to their bank for a loan?
But the risk of default still exists. Fintechs could use existing credit agencies, but they might not be able to improve the service being offered by banks. A new approach to determining whether a customer is good for the loan is needed.
Social Lender in Nigeria believes that your social networking activity holds the answer. They now have over 10,000 customers borrowing small amounts (usually around $30) and have a default rate of less than 4%. The service offers instant cash, scanning your social networking activity and applying an algorithm to the data to determine if your online behaviour indicates whether the lender should trust you to repay.
Lending small amounts like this may not sound like a significant dent in the business of larger banks, but the possible father of microfinance, Grameen bank in Bangladesh, now has revenues of around $200m a year – all linked to small loans.
If new banks and fintechs in Asia and Africa can determine better ways to decide who should receive a loan, without using traditional credit agencies, then how quickly could that change the loans market in the USA or Europe? A combination of building a customer focussed loan service and designing new credit checks could create an entirely new type of market for loans of all amounts.
What do you think about this combination of emerging credit checks using social networks and designing apps that offer loans? Will fintech companies really challenge the traditional banks? Feel free to connect with me and let me know.