The Growing FinTech Market Explained

Cash needs to move in order for the economy to work. Traditionally, banks are the major lending institutions, and as a result have to cling to a variety of regulations. To provide an equitable system that people aren’t afraid to use, there are a lot of checks and balances that have put in place by the bank and regulators. Today, there is an increase of what are called marketplace lenders (MPLs) that are altering the way people and businesses can access capital and it is powered by what is referred to as FinTech, or financial technology. Below let's take a look at FinTech and how it is changing the way we manage, borrow, pay, see, and use money.

While the banking institutions have to deal with strict lending regulations, MPLs are relatively new, and utilize FinTech to lend, collect, and distribute the capital they have. Consumers are starting to catch on, and in all, over $7 trillion is at risk of being displaced from the financial services market as a result of the growth of these organizations. MPLs are in a favorable position because they utilize modern technology which insulates them from runaway systemic risk inherent in non-regulated financial transactions. Now, legislators are trying to figure out ways to regulate these organizations that won’t hinder their ability to innovate, but will work to prevent them from taking advantage of consumers.

What Exactly is FinTech?
FinTech is technology utilized to track and manage finances. Your credit card, your PayPal account, and your personal account dashboard on your bank’s website is all FinTech. Using technology for finances isn’t new, but like many other technologies that have advanced as hardware and software improvements have been made, it’s being repurposed outside of the standard banking structure. FinTech today covers a lot of ground. So while banks have been doing this for a while, MPLs are backed with enough VC to start a small country and that capital allows these organizations to invest like no independent companies have been able to prior. It usually provides nice returns for a lot of investors. So while it is an affront to the banks, investors aren’t having to limit their sights to banks for financial services.

In our current era, most of the money is flowing through asset managers who are taking the capital that is entrusted to them by investors and investing it in non-traditional ways via technology. Defining FinTech can be a challenge in itself as the language differs significantly depending on where the company operates and what type of lending facility it is being used for, but as far as the need to adhere to federal regulations, new FinTech models present gray areas that are going to have to be addressed at local or state levels as regulations haven’t been implemented yet. Federal investigators have been looking at the sector for the past five years. So while the traditional banking structures are threatened by these restrictions on what they can and can’t do with the capital, the new marketplace lenders have been able to do more with less.

Payday Loans
Independent lenders have always been around. Stories about the shylock that pays people a visit if they don’t pay their bookie are all over the culture. One lending organization that has been very controversial is the payday loan market. Basically, a person that needs fast money can take out a short-term, high-interest loan. If they pay it back by the next paycheck, no harm, no foul, the lender takes its small fee and all is good.

Bad things start happening when that person can’t pay the whole loan back on time. Once the loan is past due, it is basically renewed with interest added. Most of the people that will use this service need a couple hundred dollars quick and can’t wait until their next paycheck. If the borrower can’t pay, they are making a situation that was already dire, much, much worse. These loans have been outlawed in several U.S. states for their predatory nature, but in the places that haven’t outlawed them, they are seeing new challenges in the form of FinTech lenders.

FinTech lenders such as LendUP and Elevate are now seeking to disrupt the payday lending industry by offering people who are in need of small, short-term loans, money on considerably different terms. The biggest difference is that instead of resorting to predatory tactics, they work with borrowers so they don’t get in too deep. Thus, while the payday loans may have been convenient for the borrower, one misstep would get them in over their heads; the new FinTech model is helping people rebuild their credit through data driven analysis.

What FinTech services do you currently utilize? Would you recommend any of them?