In the last few years, fintech has been taking the financial industry by storm, and so it comes as no surprise that fintech has had a significant influence in reforming the banking and lending industry. Although the number of nonbank lenders has been exponentially growing, their total is still far from reaching the volume of transactions formerly completed by traditional banks.
Banks have been uneasy regarding the lending industry’s future when taking into consideration that alternative lenders are not subject to the same rigorous regulations as well as their usage of substitute data sources. This blog post explores the advantages and disadvantages of loans secured by large fintech lenders in comparison to similar loans that were constructed by traditional banking networks.
Throughout the last few years, we have been witnessing alternative lending companies grow from limited platforms aiming to connect individual borrowers with individual lenders to sophisticated systems that incorporate institutional investors, direct lending and securitization transactions.
According to the Federal Reserve study ‘Fintech Lending: Market Penetration, Risk Pricing, and Alternative Information’, “while the growth of nonbank lending may raise some regulatory concerns, the firms’ technology platforms and their ability to use nontraditional alternative information sources to collect soft information about creditworthiness may provide significant value to consumers and small business owners, especially for those with little or no credit history. In addition, as more millennials make up the pool of small business owners and the consumer population, they are more comfortable with technology and therefore, may be more comfortable dealing with an online lender than in dealing with a traditional bank.”
Moreover, according to the study, “even when shadow banking entities are subject to consumer protection and transparency laws, the supervision of their compliance is the responsibility of the Consumer Financial Protection Bureau (CFPB) which is risk-focused based on consumer complaints, the seriousness of the issues, and the availability of staff.”
On the contrary, banks meet consumer protection as well as transparency regulations that ensure the following: customers are treated fairly, have equal access to credit, and receive offers that can be easily understood and compared. Furthermore, while the alternative data sources and the algorithms utilized by online alternative lenders have provided faster as well as lower cost credit assessments, these new variations could possibly result in disparate treatment and fair lending violations.
As fintech lenders have the ability to solve credit gaps where as banks have less of an ability to (and can only offer credit to ‘credit worthy borrowers’), banks can counter these emerging trends by partnering with fintech firms.