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How Fintech Is Changing The Lending World

This post is part of The Marketplace Lending Thought Leadership Series on the Orchard blog. This post below is by Benjy Feinberg, CEO & Co-Founder of Behalf. We encourage other thought leaders to share their industry insights with us and participate in the series. Please reach out if you’re interested.

Eight years after the Great Recession, it’s still incredibly difficult for borrowers to get access to traditional funding. According toHarvard Business School, bank loans to small businesses decreased by 20% since the financial crisis of 2008.

Market disruptors saw an opportunity to close this credit gap by using algorithms and big data. But, what began simply as an alternative to a bank loan is evolving into something much bigger.

Background: the startup culture in the finance world

The conventional model to evaluate creditworthiness looks at an applicant’s credit or FICO score. Yet, these scores don’t necessarily portray a loan applicant’s whole picture.

For example, if a borrower utilizes more than 30% of available credit on their credit card, their credit score decreasesdramatically. The result is that many businesses can’t use their credit card as a source of financing, as the system penalizes them for high utilization.

Market disruptors decided to rework the existing model and evaluate credit worth by looking at the borrower as a person, not just a score. Many FinTech companies began to sprout up, leveraging technology to provide borrowers with flexible lending solutions and smaller, short term loans.

FinTech’s effect on the relationship between borrowers and lenders

Integrated online platforms put more power in the hands of borrowers.

As online lending options expand, borrowers expect an almost instant financial decision. They no longer have to settle for the lengthy approval process and paperwork of bank loans. So if lenders take too long to react, they’ll turn around and find that the borrowers moved on.

Whereas banks can take a week to approve a loan applicant, some FinTech companies can grant approval within minutes. With all the new options available, users can compare loans, offer peer feedback, and participate in community forums to discover how to leverage these platforms for their borrowing needs.

Are old players keeping up?

Traditional banking institutions recognize FinTech’s force in the market. So, banks are left with two options: compete or collaborate.

Those that opt to compete are attempting to replicate FinTech models by increasing their mobile and web functionalities.

Yet others traditional financing institutions engage start-ups and contribute their unique added value. For example, theMasterCard, Comdata, Behalf collaboration helps small businesses pay their vendors by combining the start-up’s working capital line with MasterCard’s virtual card and Comdata’s payment processing solution.

Moving forward and looking back

While we like to think of FinTech as completely innovative, traditional banking also viewed borrowers through a wider lens than their credit score.

Years ago, bankers knew loan candidates personally and based loan qualifications on personal credentials or character. Today’s technology comes into the picture to scale the more traditional model of individual relationships, through online platforms and big data.

This is a guest post from Benjy Feinberg, co-founder and CEO. Committed to the power of building relationships between small businesses and vendors, Behalf provides small business purchase financing and works with vendors to increase sales by offering financing options to their small business customer base. For the latest industry news, follow Behalf on Twitter,LinkedIn and Facebook.