by: Grow VC Group
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In the August edition of Finance Monthly, Grow Advisors highlighted key segments underpinning the strong growth of fintech.

Together with innovations in payments, the fastest growing application in fintech today is online lending ­ increasingly attractive alternatives to services that underpin our everyday lives. They address consumer demands for faster, user­friendly services with reduced intermediaries.

”Innovation in finance is deliberate and predictable; incumbent players are most likely to be attacked where the greatest sources of customer friction meet the largest profit pools” 

[World Economic Forum ­ The Future of Financial Services]

Fintech innovation in online lending between people (P2P or crowd­lending) or between people and business (P2B) was borne from the tightening of banks’ lending practices since the financial crisis of the last decade.

Today, online lending offers a myriad of options to access capital. And the services aren’t being used only by individuals who have struggled to obtain loans from banks. Those with the highest credit grades are also turning to online marketplaces ­ both as borrowers and investors (or lenders). In the US for example, a significant proportion of the loans are being written by institutions, as they seize the opportunity to transact more efficiently using technology. The global landscape of online lending shows the increasing prevalence. 

Online lending is built on simple and accessible processes, including mobile applications. It reduces friction, enhances customer experience, and facilitates more efficient capital flow. Borrower applications take minutes to complete, a decision is possible within hours, with funds available in days. Where loans are for business, the drawbacks of the traditional lenders’ approach can be costly to business on both sides. Compared to traditional routes which can take several visits to the bank and involve manual checks over many days, the difference is clear and increasingly understood by today’s customers.

Common models for online P2P lending include algorithm based auctions, reverse auctions and fixed rates, the latter two models most widely adopted. In the reverse auction model, lenders bid for the lowest interest rate that matches the borrowers desire for yield. A nd, as the name suggests, fix rate models offer fixed rates based on the lender’s assessment of a borrower’s credit. In P2B lending, businesses with higher default possibilities usually pay higher interest rates.

Recognizing the potential of online lending, Morgan Stanley and Goldman Sachs, among others, are structuring loan packages through online lenders. Grow Advisors is advising an increasing number of traditional wealth management firms to get ahead either through collaborations with p2p platforms or to create their own marketplaces.

The rise of consumer and small business loan segments in Asian markets is fueling a demand for P2P lending. In China, with limited investment opportunities and volatile stock markets, ordinary Chinese investors find the new lending channel appealing. It is creating a challenging competitive environment for traditional banks and denting profit margins. According to Wangdaizhijia,  a data provider, with an estimated 1,575 platforms (up from just 50 three years ago), China’s P2P lending market was US$16.72 billion, roughly doubling the US. Though unregulated, Chinese regulators are now paying attention to the growth and have forced many operators to close.

The global economy is still based around businesses where the vast majority of the transactions take place offline. While financial services are still dominated by banks legacy systems and physical branches, fintech is taking the battle for customers online and lending could well become the first traditional business segment to experience significant transformation.

Read the whole article on Grow Advisors Blog.

Source: Liberum Capital

Source: Liberum Capital

A Grow Advisors article originally produced for Finance MONTHLY

Grow Advisors is proud to support the growth of FinTech around the world. We offer consulting and professional services on crowdfunding, crowd investing and p2p finance globally. Our advisors develop platforms that connect startup ecosystems, set­up marketplaces and co­ investment models, structured investment instruments, and find innovative ways to create finance solutions globally. 

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Grow VC Group The Grow VC Group is the world leading, global pioneer of securities crowd funding, peer to peer marketplaces, new investment models and global business development. Established in 2009, the Group has developed new investment models on six continents and continues to innovate the global market.

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