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The last two decades have seen a lot of disruption in several fields including media, transportation, communication, finance, and education. One of the sectors that have forever been changed by technology is the lending industry. The amazing thing about all the disruption that has happened in the lending industry is how fast new innovations have been adopted by both customers and lenders.
Since technology makes more technology possible, the innovations in the financial services sector over the past few years have been exponential. Here’s how technology changed the lending industry:
The Explosive Growth of Online Lending
A number of things worked together to spur the explosive growth of the lending industry after the financial crisis. One of them, without a doubt, was the rapid pace at which alternative lending solutions developed and adopted new technologies.
During and immediately after the financial crisis, banks became extremely reluctant to take risks. The number of loans being offered by banks couldn’t meet the demand for credit. With a growing demand for credit and a banking sector reluctant to dish out loans, alternative lending institutions saw an opportunity they could exploit. Since they didn’t have the extensive infrastructure or networks big banks enjoyed, betting big on the power of the internet was the most logical path to maximizing their potential.
The bet paid off. Online lending is now the norm and it is poised to shape the future of the industry. The innovations that came resulted in shorter loan processing times, lots of options for customers to choose from, platforms where customers could compare different loan products offered by various lenders, online tools to calculate interest and other loan costs, platforms for customers to check their credit score whenever they want, and several new online payment service providers and payment gateways.
Today, if someone wants a loan fast, all they have to do is do a Google search. This applies to popular loans such as payday loans as well. If you are in Los Angeles for instance, you can find a loan provider that serves people in your area by just searching for ‘payday loans near Los Angeles.’
One of the reasons online lending took off is how technology reduced the time it took to apply for a loan. For brick and mortar banks, the loan application process usually took a little over a day. For online lenders, on average, the application process took just about half an hour. This was a clear competitive advantage occasioned by technology and enticed several people to alternative online lending solutions.
Needless to say, banks soon saw the potential of online lending and adopted the technologies that had been developed or developed better efficient ones. The result was a more robust online lending industry positioned for years of explosive growth.
The Elimination of the Need for Intermediation
Intrinsically, the basic function of banks is to act as an intermediary between savers and borrowers. Savers get to put their money in banks and the banks lend the money to borrowers at an interest. The banks keep some of the interest earned while giving the rest to savers as interest on their savings.
If a saver can safely strike a deal with a borrower without having to go through a bank, they get to keep more of the interest earned. Technology has made this possible thus reducing the necessity of banks’ intermediation role. Two popular lending practices that have grown tremendously because of this reality are peer-to-peer lending and equity crowdfunding.
- Equity Crowdfunding
Equity crowdfunding allows a group of people to invest in an unlisted company to gain a stake in the said company. The process allows savers to give their money to businesses that need funding. By investing in the company, they stand to make a profit through dividends or capital appreciation if the company succeeds.
Technology has helped even up the investing landscape and made the average saver enjoy some of the opportunities only venture capitalists, business angels, and banks enjoyed decades ago. There are several online platforms where businesspeople can source for money from crowd investors. Some of the popular platforms include AngelList, CircleUp, We Funder, and Funders Club.
- Peer-to-Peer Lending
Just like crowdfunding platforms, peer-to-peer lending platforms seek to connect lenders (savers) and borrowers. These platforms have grown from funding very simple loans to facilitating even more elaborate loans such as home mortgages.
The peer-to-peer lending clubs and platforms offer secured, unsecured, and commercial loans. The platforms that offer unsecured P2P lending include Sofi and Lending Club. Sofi offers personal loans, mortgages, and student loans. Lending Club offers medical financing, business loans, personal loans, and auto refinancing loans.
Some platforms such as AutoFit and JustUs only offer secured loans. JustUs specializes in mortgages while AutoFit, as the name suggests, offers car loans. Business owners who want to secure commercial loans from P2P platforms can go to Able Lending, Realty Mogul, and RealCrowd.
The lending industry is not the only aspect of the financial services sector that has been disrupted by technology. There has been a massive overhaul of things such as cyber-security, data collection and analysis, investment analysis, insurance, and banking infrastructure, among others.
Since technology builds on technology, it is only logical to conclude that some of the innovations in the other financial services sectors will spur more changes in the lending industry. There will definitely be more interesting technological disruptions in the lending industry. Things can only get better.