Digital Lending

- Overview

Banks have historically processed most consumer and small business loans because they have the resources to assess the creditworthiness of borrowers and obtain regulatory approval to fund the loans. However, this model has some key inefficiencies -- interest rates are not personalized, underwriting loans is expensive, loan decisions can take months, and especially small businesses are excluded from the process. This leaves room for a market for online lending -- known as peer-to-peer (P2P) lenders -- to use the internet to offer better deals to borrowers and investors. 

Digital lending is characterized by a focus on providing cheaper loans through a fully digital approach. It also focuses on automating the entire processing of this low-cost asset. 

- Alternative Lending

Alternative lending is a collective term used to describe a wide range of lending options for consumers and business owners beyond traditional bank lending. 

Alternative lending models, such as peer-to-peer (P2P) lending and business-to-business (B2B) lending, provide cheap loans to audiences who are cash-strapped or traditionally viewed as invisible to credit. FinTechs may have discovered a new market segment and created a new ecosystem, but banks remain key to thriving and developing throughout the lending cycle.

- P2P Lending

P2P lending is a new form of debt financing that allows people to borrow without a financial institution. Using technology and big data, P2P platforms connect borrowers with investors faster and cheaper than any bank. P2P lenders address the inefficiencies of the banking model by developing online marketplaces that use sophisticated algorithms to match borrowers with investors based on the specifications of each party. 

As consumers and businesses move more of their activities online, they create unprecedented volumes of data. Online lenders have used the data to make underwriting decisions, creating computer programs that can automatically issue loans without requiring customers to set foot in a branch. These programs can use traditional underwriting metrics—such as debt income or cash flow analysis—or less traditional metrics, such as the number of visitors to a company’s website. 

Peer-to-peer (P2P) lending platforms provide lending opportunities beyond traditional lending institutions. P2P platforms use metrics such as credit scores and social media activity to connect borrowers and lenders at favorable rates. Platforms have a lower regulatory burden as they simply act as an intermediary between borrowers, lenders and partner banks, thus keeping fees and interest rates low. 

P2P borrowers are typically individuals looking to refinance debt at reasonable rates, or small businesses that struggle to obtain low-value loans from traditional institutions. Lenders are typically individuals seeking higher rates of return than other interest-bearing accounts.

- B2B Lending

B2B lending is similar to P2P lending, but for businesses. It enables Small and Medium-sized Enterprises (SMEs) to obtain the funding they need for growth directly from a group of online investors (individuals and institutions). The advantage of this model is that it allows businesses to reduce complex and time-consuming paperwork time for intermediaries such as banks. Also, just like personal P2P lending, B2B lending offers competitive interest rates and financing terms, as well as transparency and ease of use. 

The main advantage of B2B lending is flexibility. Businesses can choose the term, due date and prepayment requirements. You can shop around and compare your options to market prices, offering more value than banks.