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How Fintech is Driving Innovative Lending
By James Cheow, CEO & Co-Founder, Capital Corporation
They are bringing much-needed innovation to a space that has remained traditional for too long. Harnessing the potential of new technologies such as blockchain, big data and smart analytics enables new business models to emerge: FinTechs have swiftly realised that analysing client data, including the flows of payments and remittances between counterparties, gives them a powerful tool for accurately assessing risk and creditworthiness. Also, digital networks enable innovators to establish lending models that don’t rely on large intermediaries to manage risk and provide liquidity. Alternative forms of lending are lean, efficient and able to reach parts of the market previously seen as unprofitable or difficult to risk-assess. This process of disintermediation leverages the inherent flexibility of electronic networks, putting borrowers in touch with lenders more directly and efficiently, with smart analysis functioning as the match-maker to introduce borrowers to appropriate solutions. New lending models emerge s, taking costs out of the process has transformed the economics of lending – making smaller amounts cost-efficient to lend, and smaller borrowers more feasible counterparties. Technological solutions have also delivered convenience in the ways small borrowers can make repayments: in Singapore, innovative lenders first enhanced the customer experience by offering simple repayments at post offices and via AXS machines. Today, repayments are run largely through digital platforms, greatly improving business processes for many SMEs each day. The business case for FinTechs is often very compelling. Funded by investors rather than the banks’ reliance on depositors, FinTechs offering new ways of lending are experiencing rapid growth – and the amounts they are handling are set to skyrocket. Statista projects from $ 64 billion in 2016, the global total could reach $1 trillion by 2025. The investment case can be attractive for lenders: for a relatively low upfront capital demand, alternative lending can offer a healthy mid-range return. Across the U.S. industry, lenders gain an average 4.4 percent return, making alternative lending significantly more profitable than a savings account or other low-yield investments. Investors willing to offer higher-risk loans can access yields of 10 percent to 12 percent. In some markets, like India, returns can reach 18-26%, according to lender Faircent.com. Responsible business practices However, the alternative lending space for SMEs is still young, and participants need to take a responsible approach to some forms of alternative lending. China, which took to the Peer-to-Peer (P2P, one of the faster moving types of alternative lending) model enthusiastically and experienced rapid growth, has recently introduced measures to protect consumers after concerns that the model could be exploited by unscrupulous operators. Having snowballed, growth has now slumped as greater regulatory oversight has driven many platforms out of business. With protections for both lenders and borrowers a key element of ongoing market health, responsible FinTech firms should keep abreast with relevant regulatory developments and ensure compliance. For Capital C Corporation, taking a holistic approach is key when it comes to nurturing new ways of lending. We see the success of FinTechs’ alternative offerings as a long-term proposition, and avoiding the issues experienced in markets like China is the only way to build confidence and trust. In turn, confidence and trust make for a strong foundation for long-lasting lending businesses. They build a stable base of returning customers who, satisfied with the service they have received, will come back again and again. A responsible approach to building alternative lending businesses will ultimately lead to a resilient and dynamic alternative credit space occupied by companies providing suitable and sustainable sources of finance. A healthy SME sector is critical for any country’s economy, and we feel strongly that with suitable lending options in place SMEs that were previously underserved by traditional credit institutions can continue to go from strength to strength.