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The Global Impact of Online Lending Platforms

  • June 1, 2021
  • BY EA Editors
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The Global Impact of Online Lending Platforms

When you look at the financial crisis that happened over 10 years ago, you will soon see that small businesses that needed some kind of credit were in fact stuck. They had to deal with new capital rules which actually discouraged big banks from even touching any borrower that might be risky. The loan and bond markets, where bigger businesses flocked for capital didn’t have much use for sums of money under $100,000 and this is actually what most small companies need. A handful of non-bank lenders have chosen to fill the gap. Small lending operations have grown fast and the question is now, whether the new branchless banks can thrive in a market where credit is tight.

 

High Interest

The interest rates on loans from online companies tend to be quite high. They are often the same as a 30-40% annual rate. The borrowers tend to have a very short credit history as well, which shows that there are in fact signs of vulnerability. When the crisis hit, online lenders had to rework all of their underwriting processes and when they did this, they had to re-engage and expand. 

 

Underserved Market

A lot of lenders have found themselves operating in a very underserved market. The new data sources mean that they can underwrite risks that were once too hard to capture. Credit scores are a very good predictor when it comes to consumer credit performance but the problem is that there is no rule when it comes to small business loans. For a bank, lending to a small business is not as economic as it once was and a lot of this comes down to the cost of underwriting. This has made it possible for online providers to leap into the gap, which is fantastic, to say the least.

 

Data

The great thing about some online companies is that they do not use the financial income alone when trying to determine whether or not someone is a good fit. Instead, they work with a lot of people and a lot of financial data to try and work out whether someone is a risk. Some companies even take into account shipping data as well and this makes it very easy for them to get a bigger picture. It also means where some banks were rejecting customers in the past, online companies can take them on as clients and this makes the overall risk both parties face much lower.

Of course, there has been a lot done to try and make sure that online loan providers are given the chance to succeed in the current market and right now it looks like so much is being done to try and give small businesses a chance too. This is all great and it just goes to show how far the financial market has come so far. That being said, there is unfortunately still a very long way to go. Some companies are still struggling to get credit and loan providers are working hard to try and fill this gap.

I hope you enjoyed reading this article: The Global Impact of Online Lending Platforms.

 

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