Financial Technology (FinTech) companies leverage digitalization and modern technologies to improve how financial assets are managed, created, and exchanged. These make them more streamlined and efficient in managing risks than traditional financial organizations.
They also adopt a more inclusive approach to personal finance, targeting a broader swathe of user demographics. Furthermore, their products and services are typically accessible on mobile devices.
In other words, almost anyone can access FinTechs’ products and services anywhere, anytime. However, like in any industry, every FinTech company follows a different business model. Let’s briefly explore the leading ones here.
Any bank, with or without any physical presence, that’s operating online is called a digital bank. It digitizes all traditional banking products, services, and activities to serve clients through online channels.
Digital banking services are available online 24/7 and easily accessible on any electronic gadget, such as mobile phones, computers, and other compatible smart devices. Most frequently, they include the following banking operations and activities:
- Opening a digital bank account
- Money transfers
- Bill payments
- Cash withdrawals
- Transaction records monitoring
- Checking/savings account management
- Loan management
- Cheque management
- Obtaining bank statements
For users, digital banking makes all traditional banking products and services easier to understand, access, and manage. Banks also benefit from it since it can operate on web-based services, application programming interfaces (API), and high-level process automation. These features can lower their operating costs by up to 70%, improve existing products, systems, and operations, and optimize their revenues.
Like online banking, online lending is app-based or web-based, except it focuses on financing. Specifically, online lending provides access to financing options like instant cash loans, particularly to the underserved community. This market includes the unemployed, students, start-ups, and small and midsize enterprises (SMEs).
Here are the most common advantages of online loans:
- More convenient
- Offer competitive rates
- No/low credit requirement
- Minimal documentation
- No/low processing fees
- No collateral required
- Fast approval
- No prepayment penalties
- No deposit bank account required
- Debt consolidation
Online lenders enjoy cost containment and operational cost optimization from online lending. This digital solution automates loan processes, which doesn’t only lower servicing costs but also reduces error costs.
Alternative Credit Scoring
Another way FinTech companies help the underserved markets is by adopting alternative data elements for credit rating. Instead of traditional credit scoring models, they do a credit risk assessment based on a consumer’s behavior and data on digital platforms and applications.
Specifically, they check a borrower’s data from its digital footprint (i.e., a person’s online presence) on multiple sources. These include geolocation, subscriptions, online payments, mobile wallets, and social media. They use social signals and percentile scoring with a smart, self-learning algorithm to make lending judgments more efficiently and accurately.
This alternative credit scoring can support loan applicants, particularly the self-employed communities. Despite having a stable source, they tend to suffer from traditional lenders’ antiquated and rigorous credit scoring procedures.
FinTech companies, on the other hand, can gain from alternative credit scoring by accurately scoring more consumers. This increased access to credit can also correspond to lenders’ financial inclusion goals.
Peer-to-peer (P2P) lending is a financial solution that enables individuals to directly get a loan offer from an investor, either a wealthy individual or company, without the intervention of financial institutions. When the borrower is a company, it’ll be called peer-to-business (P2B) lending.
Since it doesn’t involve traditional banking and investment models, P2P has no intermediary costs, which benefits borrowers and P2P investors. Borrowers can enjoy lower interest rates, while lenders receive better returns than those in the debt market.
FinTech companies build platforms to connect these P2P/P2B borrowers to the P2P/P2B lenders. They help borrowers find suitable lenders and help lenders by screening pre-approved and verified borrowers. In return, they earn by charging fees on the repayment process.
FinTech companies in the transaction delivery area (i.e., offer payment processing services) make money from gathering data on consumers’ desires and requirements. They collect data by developing free products or services or using commission-based business models, where they resell third-party financial products.
When customers access free products or services, they leave behind their information. This data is then collected and cross-pollinated by FinTechs to map consumers’ capacity to pay premiums, buy mutual funds, invest in real estate, and the like, making their products or services more saleable and profitable.
FinTechs can also earn through the commission-based models, where they can get a percentage of the transaction value. They can also follow data monetization-based models, enabling them to generate revenue by selling data to third parties, as long as the process is within FinTech laws and regulations.
The global market size of FinTech is expected to continue to grow. The advancements in digital technologies, changing customers’ needs and expectations, and expanding investments in the industry will contribute to and ensure its growth for the next few years.