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How Fintech Start-Ups Are Replacing The Old Traditional Lending System

FinTech sooner or later is moving toward opting for a banking license and can be a huge marketplace for lending and investment.

Technology and innovation are integrated across various industries. The financial sector was unchanged for a long period. Emergence of FinTech companies led to a great breakthrough in the financial system. These are the companies that use technology for payments, banking, data collection, evaluation, and market analysis. In 2020, the FinTech investment grew by $135.7 billion that is 2.4 times after 2019. The digital Fintech banking trend has threatened the old banking system.

SMEs remain in the backend when it comes to traditional bank loan approvals. Traditional banks normally reject the risky and small enterprise, but there has been a need to backup these small and medium-size businesses for the retrieval of the economy since the pandemic. The two-third population are employed by these SMEs. FinTech has taken the approach of giving solutions to problems like mismatched maturity and leverage. They connect the borrowers and investors instead of short-term deposits and long-term assets. FinTech start-ups have become a quick way for investors and borrowers to make more affordable credits and investing more rewarding.

Why is FinTech better?

Service and Customer Satisfaction

The customer-oriented approach and fast services have increased the customer base for these start-ups. The companies follow different methods for risk analysis and do not stick with just the credit score. The approach to evaluating risk for SMEs involves social media reviews and usage of logistic forms. The use of AI and machine learning algorithms helps in analyzing consumer credit and financial crises. The start-ups are providing more stable and less time-taking solutions for SMEs. The millennial generation that connects more with the internet, is attracted towards FinTech and its service more than the banks.


Digitization helped in creating a more geographically independent solution for the consumer. The documents, images, videos and audios that are converted in digital format makes easy access to information. Digital images are binary numbers that create a print of you online. e-sign or personal stamp can be part of digitization. The similarity of both systems includes personal loans, business loans, and other financial services to their customers. The online authorization helps in creating a secure and safe platform.

Online and Remote Facility

The comfort of getting a loan with few clicks, reminders, alerts, and updates via phone or message and 24*7 connectivity has made the experience very smooth. All the processes are completed through the cloud and information available remotely. The information is conveniently accessible. Digitization and software incorporation provides low-cost operation.

The main revenue resource for these FinTech companies is not interest income but transactional fees.

Innovative Idea

There are fewer regulations and rules as it is a newly emerging industry and hence less restriction paves ways for innovations and creativity. Small businesses that struggle for gaining funding are dealing with a funding gap of more than $2 trillion worldwide. The risk associated with the loan approval is complex and the interest rate is too high along with hidden additional charges. FinTech came as a blessing to these SMEs. They provide loans and funding at low or no interest with minimum additional charges.

Post-Covid Era

Covid and lockdown have bankrupted many businesses and that creates a poor credit score. Banks are hesitant to approve money to these risky and less systematic businesses. Although the government is bringing new policies and schemes to fund these SMEs. The gap is still very high. FinTech as the amalgam of finance and technology appeared to be a powerful business model.

The convenience and benefit of the FinTech services are making a big wave of replacing the old traditional banking system. FinTech provides peer-to-peer lending, merchant and e-commerce finance, online supply and trade finance. The boom has created a lot of start-ups to create development and growth in this sector.

Risk Association with FinTech

It is considered that it is risky being involved with these companies as the system lacks monitoring and regulations. There is a definite need for proper authorities and laws for the process of money lending. Poor credit scores lead to under payee premiums and overburdened consumers. The money retrieval method can lead to violence and aggressive methods without proper monitoring.

FinTech as a Promising Venture

The new FinTech companies have gained one-third of the new revenue that has been a loss for traditional banks. It has become a promising market with increasing start-up companies and customer base. Many giant companies have become more than just a payment business and converted into banking system integration with small finance bank licenses.

According to the law, fewer practices are illegal but a large financial sector is not under any jurisdiction that helps FinTech flourish in the finance department. The only limiting factor is the hold on money deposits that is not allowed. Banking as a Service (BaaS) is becoming a new concept where banks are collaborating with FinTech companies for mobile delivery and full-time customer service.

If FinTech gets the bank’s license they can replace the banking system with some tweaks and changes. The past two years have been profitable for the FinTech business that wants to enter the banking system. The traditional banking system lacks the technology and service FinTech offers. FinTech companies handle loans, investments, insurance policies, and transaction facilities. The vast departments engage customers to a greater extent.

Banks are trying to partner or collaborate with the FinTech companies knowing how it can affect their business. FinTech sooner or later is moving toward opting for a banking license and can be a huge marketplace for lending and investment.

Final Thoughts

The FinTech system is really good and reliable. The online availability, easy money approval, quick transactions, and modern risk analysis has made it attractive. SMEs that need urgent cash flow and finance are looking at these companies like blessings. The less paperwork, flexibility for premium submission, less interest rate, and no collateral are all customer-oriented features. The concept of keeping benefits for the customer in mind impresses the consumer and a big shift from the banks has been seen. The need for small and urgent loans has increased after the pandemic and lockdown.

Source: Business World

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