The Problem with Credit: How FinTech Startups Are Expanding Access to Financial Products
Intro to Lending
Financial incumbents and FinTech startups are utilizing technology to change how individuals and businesses apply for loans. Access to capital is crucial for many different reasons. Students can take out loans to pay for tuition (though we can all agree this might be getting out of hand). Businesses can borrow money to invest in new equipment for growth. Families can use this money to help pay for a new car or house… Having the ability to borrow money can be a great opportunity.
However, many people have limited access to capital. They can lack access to a bank, have a poor credit score, or lack a credit history completely. Several FinTech startups are on a mission to fix that. With help from technological tools, financial institutions can increase financial inclusion and provide loans traditionally excluded from such services.
With help from technological tools, financial institutions can increase financial inclusion and provide loans to those traditionally excluded from such services.
Faster and Simpler Application Process
The idea of a loan is not new. People have borrowed many for years, even before commercial banks were around. For the greater part of the last century though, you had to walk down the street to a local bank in order to apply for a loan. You’d probably fill out a bunch of paperwork and then wait for the bank to contact you.
Technology has transformed that process. You no longer have to walk down the street. You can apply from your computer or a mobile device. You don’t have to fill out pages of cumbersome paperwork. You can apply via a simple online form. You don’t need to wait weeks or even months to learn if you’ll even get the loans. Technology has made it easier for banks to review these applications at a quicker pace. Technology has reduced overhead costs to banks, as well as helped make applying to loans simpler.
In emerging markets, this is crucial. Banks often only exist in cities or urban areas, and do not have the capacity to lend to those in the country. This excludes people out of the financial system (over 1 billion adults worldwide, actually). These people are unable to take out loans or save money in a bank account, which then hinders their ability to start businesses, invest in their children’s education, and more.
Diversifying Data Points
Furthermore credit scores are created from a prior lending history. Typically banks use a credit score (a rating between 350–800) to help determine how risky an individual is, which then determines the interest rate (if they receive a loan at all). Both these scores are calculated using information such as debt, repayment history, and expected future income.
Technology has enabled firms to enhance and diversify this process. Firms can collect and analyze thousands of data points faster than ever before. Several startups are creating their own credit rating systems using different types of data (educational levels, number of phone calls and soil fertility are some of the most interesting). Here are a few FinTech companies I’ve come across who do this type of work. (Yes, FinTech is more than just blockchain)
*Note that there are plenty of other lending platforms out there, this list is purely meant to highlight different approaches companies have towards lending*
Companies
SoFi
Offers a range of financial products like student loan refinancing and mortgages (plus wealth management services). Catering mostly to young professionals, they pride themselves on a quick and transparent application process. Their digital platform and unique underwriting process (i.e. factoring in an individual’s career and education) allow them to charge lower rates.
Kabbage
focuses on providing small loans to businesses. Using data like accounting data, transactions, shipping data, and social media Kabbage gains a holistic view of the businesses’ health before providing loans. Business owners can apply for up to $250,000 using Kabbage’s mobile app or via their website, and have a decision within minutes.
Amazon Lending
is a service offered to merchants on Amazon marketplace. Using data collected on its platform, Amazon determines which businesses are credit worthy. Though this service is invite-only, Amazon has lent out over $3 Billion since 2011.
Tala
in emerging markets a lack of credit history is one of the barriers to obtaining loans. In places like Kenya, Tanzania, and the Philippines, Tala uses consumers’ smartphone data (like # of people in their network and frequency of calls) in place of a formal credit history to provide loans.
Harvesting
aSaaS (software as a service) company that helps microfinance institutions provide loans to farmers. By supplementing traditional data with info on the farmers’ crops (i.e. yield, soil fertility, etc.), Harvesting better determines farmers’ credit riskiness. With this capital farmers can pay for better equipment and supplies, increasing their livelihood.
