When they first emerged as an alternative to traditional funding, online loans were regarded with a lot of skepticism. There was a lot of misinformation on the topic, and many lenders, which made headlines for their unreasonable interest rates, were an inaccurate representation of what the industry was trying to achieve. Now, online lending is one of the strongest branches of Fintech, and it’s holding up better than expected, in spite of the pandemic. According to a recent study, the number of people who relied on the Internet to secure loans rose consistently throughout 2020, and the big banks are struggling to provide the same level of service.

What are the shortcomings of traditional lenders, and how are Fintech companies making a difference?

The process of obtaining a loan from a traditional lender has always been riddled with bureaucratic hurdles. Everyone who has ever needed a quick influx of cash knows just how frustrating it can be to go to the bank, sit in a queue, fill in a mountain of paperwork, wait for about a week for an answer, then repeat the process several times for other banks, until they got accepted or received the best terms. It was tedious, unproductive, and emotionally draining, especially if you were in a situation where you needed money urgently.

For years, consumers put up with that because banks were often the only option they had, but that changed with the pandemic. Factors such as layoffs, financial uncertainty, and unexpected life events put a strain on personal budgets, increased the need for flexible lending products, and many banks let their clients down. Amongst the most common complaints, these stand out:

• Strict lending criteria
• Lengthy and tedious application process, riddled with bureaucratic practices.
• Banks took too long to give a reply or wire the money.
• Some contracts still had to be completed in person, which was a major concern during the lockdown.
• Inflexible lending products that didn’t address the unique financial challenges that individuals and small businesses faced during the pandemic
• Lack of transparent communication between traditional loan providers and their clients  

Meanwhile, online lenders stepped up when customers needed them the most and offered a simpler alternative. During the pandemic, many people discovered that digital lending has actually fixed issues that the traditional system has been struggling with for years. More specifically, these are the key benefits that customers have discovered by switching to Fintech lenders:

• Easier access to information. Instead of going to the bank personally to ask about a certain loan type, people can instead look up that information online. For example, they can read about the difference between registration loans and title loans, compare loan providers, and then proceed to apply from the same platform. Apart from increasing convenience, this has also boosted client education because they became more aware of the various loans that existed outside the traditional bank loans.

• Effortless application process. Instead of relying on paperwork, Fintech companies do everything online.

• Faster processing times. Because online lenders have access to tech tools that analyze applicant profiles and estimate their level of risk, people receive the answer in a short time, usually less than 24 hours.  

• More flexible lending criteria. If banks are known for judging an applicant’s level of risk purely by their credit score, online lenders are more flexible and do not deny a person’s right to funding based only on this. During the pandemic, this was one of the main factors that drove growth for Fintech lenders. Even clients who had previously been loyal to banks started considering digital lenders, seeing that banks refused to cover their needs.

• More flexibility in lending options. No two individuals or businesses are alike. A lending product that works for one person might not work for another. Fintech lenders have understood this and offered clients a wider variety of loans.

• Faster access to capital. One thing that the pandemic has proven is that sometimes clients cannot wait for weeks until the bank releases the funds, so Fintech lenders became a quicker alternative. For example, Millennials with little work experience and no credit history are often rejected by banks, and if they were accepted, it took up to five weeks to receive the money. This is why so many young people turn to digital lenders.

Thanks to these benefits, the Fintech lending market has experienced significant growth. According to a report from Mordor Intelligence, the digital lending market is expected to grow at a CAGR rate of 11.9% between 2021 and 2026, powered by these key factors:

• Digital lenders offer quick and effective financial solutions even in a time of crisis.
• More and more people are discovering that digital solutions are better suited for their unique needs.
• Consumer expectation is changing drastically; people want more flexibility in lending options, and Fintech is ready to offer it.
• New technologies, such as AI, machine learning, and cloud computing, help Fintech companies process huge amounts of data, which brings an increase in the quality of customer service.

Digital lending growth has been consistent all over the world, but the most rapid growth has been reported in the Asia-Pacific region, followed by North America and Europe.

The tech looks promising.

Comparing the services of traditional banks and digital lenders, many people wonder why the gap between the two has grown so wide and why Fintech is able to offer faster, more efficient services. The answer lies in the technology they use. While banks still rely on legacy software and bureaucracy, Fintech companies use cloud-based platforms and leverage the power of AI and machine learning to enhance their services. As a result, they’re able to process huge amounts of data and create tailored products. In all this landscape, there’s good news from banks, too: given the meteoric ascension of Fintech, many banks have started to upgrade their system and speed up digital transformation. For example, more and more banks now have mobile apps, AI-powered chatbots, or allow clients to use certain lending products without a visit to the bank.