The prevalence and capabilities of technology have made it possible for even a 2-year-old to benefit from these innovations, but, as progress continues forward at a rapid pace, these children will one day consider our highest tech antiquated. We are in the midst of a revolution. This revolution doesn’t necessarily have to do with politics or governments either, but rather with the way business is conducted worldwide. Technology has had a tremendous effect on all aspects of our lives. We are now more connected to the world than ever believed possible in the past. It may be hard to believe, but we are still in the infancy of technological change.
Nowhere has technology had more of an effect than in finance. Everything from the speed of information, the way we bank, and even money itself have been forever altered by high technology. Emerging from this evolution is the financial technology revolution, #Fintech for short.
The Connection Between Technology and Finance
Fintech is the application of technology to finance. Specifically, the term means any technological innovation applied to finance.
The modern day fintech revolution started in the 1950’s with the launch of the first credit card, Diners Club. Next was the advent of the automatic teller machine (ATM) in the 1960’s; then the revolution moved to the financial markets with electronic trading starting to replace face to face trading on the exchange floor. The next big step in fintech happened in 1980 with the application of mainframe computers to banking. This enabled better decision making and record keeping than ever before. In the 1990’s the revolution targeted financial markets with the advent of online brokers and the ability for individual traders to place trades over the internet rather than the phone.
Today, the fintech revolution is in a major acceleration phase. Mobile wallets, crowdfunding platforms, and even robo-advisors that make actual investment decisions have hit the marketplace. While fintech used to primarily benefit the institutional side of finance, today it is helping the individual, perhaps to an even greater degree.
The Fintech Impact
Perhaps the most powerful way that fintech has rocked the financial markets is how business loans are obtained. This change is so severe that some economic pundits are even projecting the demise of traditional banking institutions. Business people no longer have to go to their local banks for business loans. Companies have sprouted from the fintech revolution and can provide online working capital to businesses without the need for banks or other traditional lending institutions. The traditional way of applying for loans by waiting in line at your bank and enduring the sometimes humiliating process has been upended by the new wave of fintech business lenders who want in on the tech investment action.
Fintech business lenders are growing at an astonishing rate. In 2013, fintech lenders collectively boasted approximately $4 billion in investment dollars. While not shabby at all, this number ramped up to $12 billion in 2014. The rapid emphasis in investment is the result of a dramatic increase of businesses turning to the internet in seek of working capital loans. In 2014, one in five small businesses looking for capital applied with an online lender per a Federal Reserve Bank of New York survey. This number has only been climbing higher since the survey.
How Fintech Does What it Does
Fintech online working capital lenders utilize big data and unique credit scoring models to determine if a business qualifies for an online loan. While traditional online working capital lenders use simple metrics like owner’s credit score and collateral, fintech online working capital lenders take an entire portfolio of data into consideration to make decisions. In other words, they look at your entire business process all in one place rather than 2 or 3 single metrics.
Recommended Reading: How to use working capital to your industry’s advantage
Fintech lenders require borrowers to build a complete picture of their company by providing bank statements, tax records, cash flow, and even public record search authorizations. With new, intuitive accounting and bookkeeping tools, entrepreneurs can access this information at their fingertips and immediately extract what they need. The fintech lender not only requires a snapshot of this data, but the business is monitored throughout the life of the loan to help lessen the risk to the lender. Once the data stream is initiated, the fintech lender combines it with local, regional and even national economic data to paint a clear picture of the lending risk.
Before the fintech online credit revolution, this type of information sharing was non-existent. The exchange of information creates a powerful incentive for the borrower to provide accurate and timely information as it can help them obtain better rates and terms on future loans. At the same time, unlike traditional lending institutions, every business that shares information helps build a complete database of the industry further refining risk.
As you can see, fintech has revolutionized small business funding. What used to be an arduous process that could take weeks for approval or denial takes a matter of days today. Thanks to the new wave of online working capital lenders, decisions can be made in moments with the credit line being accessible. Furthermore, credit scoring tools are continuously refining the credit decision process, creating less risk for the lender and lower cost loans for the borrower. Fintech has indeed created a win-win situation for both the business lender and borrower.
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