The Strategist

Fintech lending: Popular yet controversial

05/29/2017 - 14:59

The Committee on the Global Financial System (CGFS) of the Bank for International Settlements, together with the Financial Stability Board (FSB), presented their first report on fintech platforms for lending. As the sector is growing rapidly, the regulators found it interesting to measure potential impact on the nature of lending and the traditional banking industry. Their main conclusion, however, is the same: fintech is still very heterogeneous.

A fintech loan is a loan issued via internet, including directly from one user to another (peer-to-peer, P2P). Most often, the role of platforms is to establish direct contact between borrowers and investors, although some use their own funds. The platforms allow various types of borrowing, including consumer loans, business loans, real estate loans, etc. Automated processes, including filing an application, assessing risks and determining rates, allows electronic platforms, unlike banks, to keep low cost of transactions and facilitate the procedure for obtaining loans for end users. They can also increase availability for certain segments of the population and businesses that are not sufficiently covered by the banking sector. For example, 79% of British P2P-borrowers tried to obtain a loan from a bank, but only 22% of banks were ready to provide it. Fintech-platforms, while operating in the gray zone, carry less regulatory costs. In general, this allows them to set lower rates for borrowers and higher for investors, although their size varies considerably depending on the level of risk. In the US, the range of rates for fintech loans is 6-36%, while the average rate for bank credit cards is about 12%.

The largest market for financial credit has been formed in China in 2015 ($ 99.7 billion, 356 platforms). Next come the United States ($ 34.3 billion, 67 platforms) and Great Britain ($ 4.1 billion, 21 operating platforms, 66 in the process of obtaining necessary permits). Despite the rapid growth of the sector, the total volume of fintech-lending is still very small, although its share may rise in some market segments, the researchers note.

The most popular goal of consumer fintech loans is debt refinancing, including student loans in the US. Loans to buy a car or improve living conditions are much less popular. Average size of a loan is $ 5-25 thousand in most countries, and this figure exceeds $ 50 thousand in China. Lending to small businesses on average accounts for about a quarter of the total volume of financial loans. 

The creditor bases are significantly different. Some of them rely primarily on individual investors, others actively use funds received from institutional investors and banks. In some jurisdictions banks are the only sources of credit. Most platforms attract funds from within the country, only in the Asia-Pacific region (including China) foreign financing accounts for about a third of the total. Average amount of investment for private investors in China is $ 8-10 thousand, and only € 100-500in France; in some countries, regulators have a ceiling for such investments. According to analysts from CGFS and FSB, investments in fintech loans are a new class of private investments. In fact, it is quite profitable - an average rate amounts to 5-10%, although it can vary significantly depending on the level of risk.

According to the report’s authors, successful development of fintech lending will help increase financial stability by opening up access to alternative sources of funds. Diluted concentration of credit capital in banks can be a good solution in case a banking crisis comes. 

As for dangers of fintech platforms, the authors attribute dependence of their financial indicators on investor sentiment, a greater predisposition to risk, imperfection of tools for its assessment, and greater vulnerability to cyber threats. In addition, a credit inclusion offered by fintech platforms can lower the overall credit standards in the market if competition compels banks to take greater risks. Regulation of new financial technologies can be a challenge for national and global authorities, the researchers conclude.