RELIANCE ON TECHNOLOGY AND DATA
Online lending companies create platforms that connect borrowers with lenders. The motivation to do this comes from the need for credit by consumers and SMEs that have no other access to capital at an affordable cost, which has opened up a lending gap.
To bridge the gap, borrowers promise to pay above market-rate returns in exchange for renewed credit access. On the other hand, technology has evolved to the point where platforms are robust and secure enough to handle large datasets and the analytics necessary to connect borrowers directly withlenders. Cheap and ubiquitous computing power and storage have clearly enabled marketplace lending. By using technology and Big Data innovatively, online lenders fulfill two important functions: they lower search costs for borrowers and address the difficulties in assessing the creditworthiness of potential borrowers. Technology also improves ease of use and rapid turnaround of applications and capital disbursements.
Traditional lenders generally focus on the small business owners' personal credit history while the new alternative lenders also focus on the current performance of small businesses by analyzing non-traditional data sources. Most online lenders analyze data from social media interactions and reviews from online sources to assess the health of a borrower or business. For example, several online lenders create predictive indices based on access to current cash flow data from bank accounts and entries in accounting software. Most lenders have developed a proprietary end-to-end lending platform including a loan origination platform, a proprietary credit scoring model, and a collection platform that collects ACH payments from borrowers as frequently as each business day.6
Automation and smart analytics increase pressure on margins and fees. Other than technology leadership, the question is who can compete best on narrow margin in the credit sector of the future. Large financial institutions can absorb the big overhead necessary for regulatory compliance, but so can well-known online lending platforms with venture capital backing, should their regulatory overhead increase. Technology is a double-edged sword: it makes the sector attractive for new entrants, but runs the risk of undermining profitability in the long term.
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