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How Technology is Spearheading a Massive Revolution in the Lending Industry Technology is a significant disruptor in every industry, and the lending industry is no exception

By Rajeev Mahajan

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For centuries, formal lending channels in India were the sole purview of banks and other non-banking financial corporations. This meant it was not easy for a small business or a start-up to find the capital required for their business.

They had to resort to the unorganized, informal lending sector to meet emergency cash requirements. This meant borrowing from money lenders at astronomically high-interest rates or to resort dipping into the meagre, life-long savings of parents or friends.

The Era of Technological Revolution in the Lending Industry

The increasing internet penetration in all corners of the country and rapid adoption of technology by all strata of people is spearheading a silent revolution in the unorganized lending industry in India. Fintech companies have changed the methods of lending that have been practiced for generations.

Before we take a look at how Fintech has transformed the lending process, let's spare a few minutes on,

Understanding Traditional Lending Methods:

A bank invites deposits from customers and provides them with interest in doing so. It then extends these deposits to other borrowers at higher interest rates than what it pays its depositors. By doing so, banks were able to make a hefty profit in this process. This is how a bank works.

The underlying principle of a bank is this, "charge borrowers more interest than the interest paid to savers."

Enter Peer-to-Peer Lending:

Let's illustrate this with an example. Say, Person A has some extra cash that he wants to put to use. And Person B is need of money to meet some emergency. What if Person A could lend this amount to Person B and earn interest on it? And, Person B could borrow this amount from Person A, at an interest rate lower than what's offered by banks?

Isn't that a win-win situation for all parties? This is the premise of peer-to-peer lending. And fintech has made this possible.

Peer-to-peer lending or online lending is a platform that connects lenders with borrowers for a small brokerage fee. This makes it possible for lenders to borrow money at lower interest rates. Additionally, lenders who weren't eligible for loans from banks and other financial corporations can now avail the required funds without much of a hassle.

While facilitating peer-to-peer lending may be the first milestone of technology in lending, it doesn't stop there.

Let's take a look at other major transformations made by technology in shaping online lending.

Offering an Array of Niche Products

For years, banks dealt with "one-size-fits-all" loan products. With technology, online lending firms could do a detailed analysis of specific requirements of their customers. This helped in developing several niche products catering to various segments of the users.

Business invoicing, a line of credit, factoring loans, loan listing, investment management, credit counselling, loan comparison, are some of the other unique products available in the lending market, thanks to innovative tools and processes.

Faster Approvals and Funding

Traditionally, loan application, sanction, and approval all were time-consuming and complicated. You had to deal with mountains of paperwork and tons of red tape before you could receive the loan amount.

Fintech eliminated the paperwork and endless waiting. Today, you can apply for a loan and receive the sanctioned amount within 24 hours, thanks to technology.

Data Utilization

Traditionally, banks take a look at credit scores to determine loan eligibility. Fintech companies, on the other hand, make use of a wide array of data. This makes it possible to collect the data within seconds and determine the borrower's creditworthiness.

For instance, if a person is a new borrower and has no other credits in his/her, their CIBIL score is bound to be low. Traditionally, it's difficult for such a borrower to prove their creditworthiness to a bank. Fintech makes it possible to determine this person's creditworthiness using other factors like social media ranking, educational qualifications, future potential's of the business and so on.

In fact, data is one of the most potent tools of Fintech companies.

Automation of Key Processes

Apart from using data to determine the creditworthiness of the borrower, fintech companies also make use of technology to automate several processes. For instance, some fintech companies have automated risk assessment, thereby speeding up the lending process.

With automation, fintech companies are able to reduce the overhead costs, thereby providing borrowers with competitive interest rates.

Loans made available, to previously ineligible borrowers

Start-ups, entrepreneurs, and small business owners found it highly challenging to borrow capital from traditional lending platforms. This became doubly difficult when they had no collateral.

Thanks to the innovative lending models of fintech companies, previously ineligible borrowers can now obtain their required funding.

Priority to Security

Since fintech companies make use of the latest technology, they don't compromise on security. This means, consumer details are safe, and all possible measures are undertaken to avoid data breaches.

Final Thoughts

As Bill Gates once said, "Banking is essential, banks are not."

Financial technology is massively changing the loan process in exciting ways. Right from how you interact with the lender, to loan processing and disbursal time, technology is revolutionizing the online lending industry like never before.

This means that more and more borrowers gain access to capital and loans have become more affordable and hassle-free than ever before.

Rajeev Mahajan

Founder, Director & CEO of Antworks Money

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