Fintech, which simply is a shortened form of saying financial technology has revolutionized the global financial markets in many ways. However, a majority of the focus has been towards the impact of fintech on various financial services like payments and trading.
In payments, PayPal (PYPL) has certainly been among the most disruptive forces to reckon, while the likes of EU/UK-based PaySafeCard the company behind Skrill and Neteller have also emerged as potential disruptors of the European payments market.
Very little though, has been said of how Fintech has been disrupting the lending market. And while there are several publications about peer-to-peer lending as a major force in the credit market. The specifics as to how this has changed the small business loan market has not been discussed to similar lengths.
The startup industry relies heavily on the ability of small businesses to gain access to flexible credit and over the last decade, this market space has grown significantly with peer-to-peer lending platforms, payday loans market, as well as, crowdfunding platforms playing a crucial role.
More businesses have also shown bias towards these emerging startup lending alternatives as they continue to convert their debt from mainstream lending institutions like banks to peer-to-peer lending platforms and crowdfunding. This has resulted in a massive boost on the crowdfunding space, which reports now indicate that the market is growing at a CAGR of 17% through 2021.
Furthermore, the emergence of ICOs (Initial Coin Offerings) over the last few years have also boosted the lending market with blockchain-based lending platforms like SALT Lending allowing crypto traders to use their crypto assets as collateral for credit lines.
This has subsequently widened the addressable loans market for small businesses as more startups have since entered the space in a bid to financing their operations at competitive credit costs. Online-based lending agencies and platforms have also advanced their offerings and features to allow businesses to finance operations, assets and service existing loans at competitive rates through loan consolidation.
For instance, SmallBusinessLonas.co, a disruptive small business loans platform provides invoice financing, small business startup loans and merchant cash advances among others to borrowers. This array of services gives borrowers the flexibility they need to run their businesses efficiently without having to worry about finances.
On the other hand, peer-to-peer lending platforms like LendingClub (LC), which acts as a marketplace for both credit investors and borrowers brings together two major parties with opposing goals. The investor, who in this case is the lender gains access to a pool of interested borrowers. The money given is distributed to the pool in a bid to cut credit risk and the investor earns interest, which when compared to what banks pay on fixed deposit accounts is far much better.
The borrower also looks at the available credit offerings and depending on their credit profiles and the ability to pay decides which offer to take. This form of lending has emerged as one of the most reliable credit sources for both individuals and small businesses.
Nonetheless, there have been questions regarding the potential growth of the peer-to-peer lending market especially given the fact some platforms like Zopa are already considering introducing deposit-taking services. Zopa was last year pursuing fundraising in a bid to applying for a banking license that would allow it to begin taking customer deposits.
By nature, peer-to-peer lending platforms do not take member deposits. They profit by charging a small fee on the interest paid to lenders and this has turned out to be a limiting factor in terms of growth potential.
Therefore, this has led to analysts suggesting that for peer-to-peer lending platforms to mount a serious challenge in the credit market against mainstream lending institutions, they will have to introduce other forms of making money.
Conclusion
In summary, fintech has revolutionized the lending market in ways that a could not be imagined a decade or so ago. While peer-to-peer lending platforms and crowdfunding appear to be driving growth in this space, other online lending platforms are also playing a crucial part given their flexible products that continue to appeal to a diverse pool of customers composed of small businesses and individuals. As such, it is fair to infer that Interesting times lie ahead in this exciting market.
