There are many new startup companies offering loans. Often they utilise an app, or mobile-friendly website, and allow the customer to apply for a loan instantly with very little information required. Decisions are made quickly and the cash can be transferred instantly once a decision is made.
It’s no surprise that these services are popular. Whatever the customer needs cash for, it can be available with a simple request and confirmation that the lender thinks the customer is creditworthy. Often the entire process, from logging in to having cash in the bank, can take literally minutes.
Contrast this process to the traditional banks, where a loan application can feel time-consuming, bureaucratic, and it require various stages of approval. First the bank needs to believe that you are eligible and the credit-scoring agency or insurance company that will underwrite your repayments needs to also check your details and agree that you are worth the risk.
The Fintech loans market has become quite sophisticated and this is a major challenge for the banks as loans are a solid source of recurring revenue, usually with interest rates that are extremely good news to bank shareholders. The British lender Wonga.com has received a large amount of bad press over the past couple of years, but their focus on small amounts and short term loans is hard to compare to other lenders. With the Wonga app, I can select how much to borrow, how many days I want to repay over, and it will immediately tell me what I need to repay – and ask if I want the money immediately.
Wonga may be criticised for their interest rates (because critics often compare these loans that are repaid in days or weeks with long term loans) but nobody can criticise how their system makes it extremely easy to plan a loan in minutes. Their service is typically for someone who might need £100 to get the family through to payday, with that amount being paid back inside a week or two. At the other end of the market is Avant, which also makes instant loan decisions and cash transfers, but focuses on a minimum of $1,000, running up to $35,000. With Avant the customer could easily purchase a car without ever needing to complete all those finance documents that car dealers love.
Many of the Fintech companies are even building their own credit-scoring platforms so they can rely less on the traditional credit-scoring agencies. Although it has so far proved to be problematic, because of data privacy issues, it is expected that before long your social network activity will be a better indicator of financial stability than the data credit agencies are collecting at present.
According to this article on LinkedIn citing data from McKinsey, over 70% of the top 500 banks globally have not achieved any efficiencies in their loans process in the past five years. The same research suggests that Fintech lenders have administrative expenses that are 90% lower than American Express. The Fintechs can run the same service, make it easier, and at a fraction of the budget the banks need to allocate.
To anyone planning loans in traditional banks, this is not just scary, it should be terrifying. Not only are the Fintech lenders designing their service to be quick, easy, and bureaucracy free, but there are also different companies serving all different lending requirements, and none of these companies have the administration expense of a traditional bank with legacy technology systems and a branch network.
If the customer experience is better, the service is cheaper, and the loan can be processed faster, then how can the traditional banks fight bank? Let me know your thoughts by leaving a comment here, or get in touch on LinkedIn.