There is a massive revolution noticed in the money lending industry of late and its is primarily due to the extensive use of technology in the operations. As it is, technology is considered as the most significant disruptor across every industry and the money lending industry is no exception to it.
For centuries, the formal lending channels all over the world were within the exclusive purview of the banks and several other non-banking financial institutions. This meant that:
- Previously it was quite difficult for the small business or any startup to find the required funds or the capital required to run their business
- They often had to resort to other unorganized and informal money lending sectors to meet with their emergency funding needs
- This way they had to borrowfrom money lenders that charged astronomically high rates of interest, if they did not want to put in the paltry life-long savings of their parents or friends.
Now, with the advent and implementation of technology in money lending, the entire system is revolutionized giving rise to a new era in the money lending industry.
With the excessively deep and increasing penetration of internet in the money lending industry in all corners of the country as well as the rapid adoption of technology and use by all strata of people, a silent revolution is now spearheading in the unorganized money lending industry all over the world.
- It has given rise to Fintech companies
- It has eased the access to loans by small businesses and individuals and
- It has given rise to the most favored online money lending resources such as liberty lending and others that provide quick and easy loans.
All these have changed the procedures of money lending that have been followed for generations.
The traditional lending methods
In order to know about the changes the Fintech companies have brought in the money lending process, you will first need to spare a few minutes on understanding the traditional methods that have been followed for centuries in money lending.
- The commercial banks invite deposits from the customers and provide interest to them for doing so.
- The money thus deposited is then extended to the borrowers at higher rate of interest that the bank pays to the depositors.
In the process the banks make a hefty profit which is the income of the bank for acting as an intermediary and a trusted source for the borrowers to borrow money and the depositors to put in their savings into their accounts.
This is how a banks function wherein the underlying principle is to charge more interest from the borrowers and pay less interest to the depositors!
Enter peer-to-peer lending
Banks have their own lending policy that may not suit your fancy. They have their own eligibility criteria that you have to fulfill and they have the full power to decide the amount to loan and much more. This meant that most people failed to avail a loan from them or even if they got, the amount received was not enough.
These constraints made the people look for alternative source to borrow money, and this is how peer to peer lending, commonly known as P2P lending or social lending, started. This specific type of money lending model can be best explained with an example.
- Suppose, a person A has some extra money in hand after meeting all the expenses and want to put it into some good use.
- On the other hand, assume that a person B needs some money for an emergency not having any amount left after meeting the expenses.
In such a situation both person A and person B will benefit by the P2P model of money lending.
- Person A will lend it out and earn interest on it and
- Person B will be able to borrow it from Person A at a much lower rate of interest as compared to the commercial banks.
Ideally, this is win-win situation for both the parties. This is actually the working principle of peer-to-peer lending, and the fintech has made it possible.
Online money lending or the peertopeer lending is now considered to be the best platform that connects the borrowers with the lenders. In return they charge a very nominal amount as brokerage fee from the borrowers. This is their income.
Therefore, peer to peer lending:
- Allows people to borrow money at a lower interest rate
- Has made it possible for people to borrow money who were denied for loans from banks and other financial institutions and
- Has made the money lending process much less of a hassle.
However, technology has not only stopped by only facilitating peertopeer lending. There are other significant milestones technology has achieved in money lending, especially in the online money lending segment.
Other major transformations
There are a few other major transformations made by technology that has facilitated in the shaping of online money lending. These are:
It offers a wide array of niche products as opposed to the ‘one size fits all’ policy followed by the banks for years. Technology helps the online money lending sector to analyze the specific requirements in details for each of their customers. This actually has helped them to design and come up with different niche products so that they can cater to a larger segment of the users. Some of the different types and unique products and services available in the online money lending market are:
- Business invoicing
- Factoring loans
- A line of credit
- Loan listing
- Credit counselling
- Investment management
- Loan comparison and much more.
All it needs is to make the proper use of the innovative tools and methods.
In addition to that, technology has also ensured faster approvals and funding, less paperwork and red tape, use of wide array of data apart from credit scores to ensure credibility in quick time, automation of the key processes to reduce overhead costs passing on the profits to the consumers in the form of low interest rates. Most importantly, it has made security and safety the priority.