According to the latest “State of Fintech” report from CB Insights, the third quarter of 2021 was the second highest on record for Fintech funding, with a 147 % year-over-year rise.
Alternative Commercial Lenders or Lending Fintechs have gradually eroded banks’ share in SME loans, to the point that Fintechs now fund about 80 percent of SME loans. Low cost of capital, increased risk tolerance, improved service in terms of processing time and documentation needed, and the fact that SMEs are more tech savvy millennials provide Fintechs with enormous power to utilize technology to disrupt the way loans are provided and serviced. In order to obtain a loan, 48 percent of SMEs believe it is unnecessary to speak with a loan officer.
Many Fintechs, in their attempts to focus on attracting consumers and funding sources to satisfy newer loan needs, tend to put technical difficulties on the back burner and end up compromising by not making the required adjustments or adopting short-term workarounds.
Here are a few of the technological hurdles that Fintechs face:
1) Managing Business Rules
Most Fintechs manage rules through Business logic coded in the software. Changes in Business rules due to regulation changes requires IT effort and some of these changes happen so frequently that a significant bandwidth of IT support goes into constantly tweaking these rules and creating newer rules.
A Rules Engine based Loan Origination System helps even Business users to create, track and modify the rules. This reduces the IT team’s engineering effort as well as User Testing effort since the rule engine-based rules are created by the Business users themselves.
2) Lead Qualification
A majority of the Fintechs use Sales personnel or Loan Officers to engage with leads and help them check their loan eligibility limits and qualification status. A bot and an automated Prequalification system can help automate the qualification process and let the sales bandwidth focus on helping customers with the loan closing.
3) Tracking Sales productivity and pull through ratios from the Loan Origination System
Dashboards and Reports are key indicators to management to help them track the efficiency of Sales Executives. Reports on pull through ratios help management understand the slack in operations and take necessary steps to make it more efficient.
4) Dealing with other stakeholders apart from the borrower
Many Fintechs use third party sales agents to process a loan. The borrower may be taking a loan to purchase an asset that may be represented by a broker. Most Fintechs don’t provide a portal or medium for the various stakeholders to view details of the loan, the collateral value, the commissions due and the due dates, certificates for claiming tax rebates etc.
5) Acquiring customers
Most Fintechs rely on Credit Reports and third party underwriting systems to evaluate the risk profile of the customer. The level playing field gives little room for aggressive play in terms of loan amount or interest rate eligibility. The top fintechs are starting to use unconventional sources like Social Media to get more details about the customer and building analytics around the data to build newer risk models to support the conventional methods.
6) Document Management and Contract Management
Many Fintechs still collect loan supporting documents from the customers via email or have Document Management Systems that are not integrated with their Loan origination systems. This makes it difficult for documents to be linked to a customer and track the documents submitted again a loan application.
Contracts executed by a majority of the Fintechs are still paper based. Fintechs must secure the physical contracts for the duration of the loan that may run into many years. A Loan Closing system integrated with a Digital contract management application helps faster execution of contracts and a digital copy of contracts reduces the burden on the physical infrastructure required to secure the contracts.
To successfully embrace modernization, Bank in a Digital Box (BiDB) offers support to FinTechs. BiDB uses a Minimum Viable Product (MVP) and add-on methodology in order to improve business efficiency, meet regulatory requirements, and attract new customers.
Different Fintechs may choose different approaches to deal with these issues depending on their maturity and priorities, but Banks are also starting to innovate and invest in technology to regain lost ground and will eventually catch up. The Fintechs risk falling behind if they do not keep up with the pace