Four Ways Fintech is Lowering the Barriers to Accessing Credit

Human desire is unlimited, but the resources available to meet those needs do have some bounds. Usually, this results in the need to borrow money to cover the difference between the funds they have and the amount necessary to meet their needs or wants. For many people, taking up a private  loan is the only way they know to pay for tuition, buy a car or home, or finance a holiday.

However, trends in the financial technology (fintech) space are rapidly changing how people are choosing to borrow. Below are some of the most disruptive areas in fintech borrowing.

Alternative data to determine creditworthiness

Banks, lenders, and credit card companies all make the decision to approve or deny a loan application based the creditworthiness of the applicant. High credit scores typically attract lower interest rates because it suggests that the odds of a default are low. Low credit scores conversely attract high interest rates because the borrower doesn’t have a proven record of astute personal finance management.

However, a credit score is not always the perfect yardstick for measuring creditworthiness. Some folks already have the credit score game rigged against them soon after leaving college with huge amounts of student debt. Some innovative fintech applications are making it much easier for lenders to review credit applications that accurately measures risk through factors like rent or bill payment history.

Automated processes for disbursements

Many lenders are now embracing predictive analytics tools that helps them to approve loans within minutes or hours of an application without necessarily waiting for a human to manually approve the loan. Electronic bank transfers also ensure that borrowers can get the funds in record time as soon as their application is successful. Interestingly, the prevalence of fintech applications has made it practically impossible for lenders to have any competitive advantage in terms of speed of approval or disbursements. Now, lenders are trying to outdo one another with the kind of perks and incentives they offer to their users. Some of the top credit card offers making the headlines this year include interesting perks such as cash backs, low annual fees, low interest rates, points, and some even go as far as offering 0 percent APR introductory rates.

Crowdfunding underserved and unserved needs

Fintech is also creating an avenue to access financing for needs that are unserved or underserved by traditional financial institutions.  Banks will typically not lend you money to fund a wedding on go on a trip to Paris. They are also usually wary about funding business ideas, preferring to see some sort of traction before they provide financing facilities. Many entrepreneurs also lack the pedigree, network, or charisma to woo traditional VC firms to invest in their idea; in fact, VC firms reject as much as 95 percent of the applications that they receive. However, with crowdfunding, entrepreneurs can raise the funds they need by collecting a little bit of money here and there.

Facilitate investment opportunities in peer-to-peer lending

Peer-to-peer lending fintech startups are filling an important economic gap by serving as platforms matching lenders with borrowers without necessarily going through an intermediary. In 2017, the volume of global P2P payments and remittances crossed a $1 trillion annually and a report by KPMG and Cambridge University suggests that P2P lending it the largest market segment of alternative finance market. P2P lending firms rate the creditworthiness of borrowers and use their risk to default to compute interest payable on their loans. Investors are able to make informed decision on whether to pursue high interest with a slightly higher risk of default over low-interest rate loans.