In the past several years, emerging technologies have facilitated an explosion of innovation in the financial sector. Financial technology, often shortened to fintech, has made use of everything from artificial intelligence to machine learning to improve customer satisfaction. Driving much of this innovation has been big data, the sum of all data a company can access about individual customers and markets. One of the areas in which big data is proving most revolutionary is in lending. Here are three of the ways that fintech companies are using big data to bring the loan business into the 21st century.
What is Fintech and Why is it Changing the Future of the Financial Industry?
Fintech is the technology that makes banking and financial services more efficient, cost-effective and secure. Fabien Ghys has provided a great overview of this rapidly growing industry. He suggested that the Fintech industry was born out of the Great Recession, as financial service providers sought new ways to deal with the challenges that they faced. They were under pressure to mitigate fraud, improve their actuarial algorithms, meet new compliance targets and address the emerging concerns of a new economy.
“The rapidly rising Fintech industry is mainly driven by the changing needs of the everyday consumer and, of course, technology, and its companies compete with traditional financial services giants in the majority of areas of the financial sector, such as loans, mobile payments, asset management, and fundraising,” Ghys writes.
So, what are the biggest implications of Fintech? Here are some ways it is changing the industry forever.
Loans have always been made on the basis of past repayment history and financial ability to repay. Now, however, big data may help fintech companies go beyond these traditional measures of creditworthiness. Using big data from sources such as social media, spending records and even data scoured from mobile phone applications, modern lenders are creating a more complete picture of borrowers on which to base their lending decisions. Using advanced algorithms, these companies can identity behavioral patterns that indicate a high chance of repayment, even if a borrower’s credit isn’t particularly good.
Making the Loan Process Faster
In addition to creating new ways to evaluate borrowers, fintech companies are using big data to speed up the loan process. Borrowers who once had to wait for a week or more to receive their credit decisions can now usually find out if they have been approved for their loans in within a day or even in a matter of minutes. For example, graduate students often times have to obtain private student loans in order to fund college after their federal student loans have been maxed out. They are able to turn to fintech lenders to apply for the loans they need and receive funding the same day in some instances.
This increased speed can be especially useful for borrowers who are trying to refinance their existing loans. If you’re forced to wait for too long while attempting to refinance student loans or a mortgage, you can be left stuck making additional payments at an interest rate higher than what your credit would seem to merit. By accelerating the loan process itself, fintech companies can help customers access the credit they need much more quickly.
Enhancing Internal Accountability
Not every application of big data in the fintech world can be seen on the customer-oriented side of a company. Lenders are also using the technology to perform internal audits of their own records and ensure compliance will relevant laws and regulations. Though it isn’t seen directly by the customer, this application does, in the end, have very real benefits to borrowers. By ensuring compliance with big data, fintech companies can cut down on both the cost of compliance and the risk of liability and fines. The savings can then be passed on to the customer, making the cost of financing slightly cheaper. This fact just goes to show that big data is an incredibly versatile tool when used properly.
These are only a few of the uses that big data, in conjunction with technologies like machine learning, has been put to in fintech. As these technologies become more widespread, companies ranging from small startups to large banks will likely continue to implement big data to improve their overall lending operations.
Fintech is Changing the Financial Industry Forever
Fintech is changing the world in impressive ways. The biggest ways that it is disrupting the industry is improving actuarial decision-making and streamlining financial services. The industry will never be the same as big data drives this new evolution in the years to come.