LO 78.1: Describe how FinTech credit markets are likely to develop and how they

LO 78.1: Describe how FinTech credit markets are likely to develop and how they will affect the nature of credit provision and the traditional banking sector.
At present, FinTech credit markets are relatively insignificant compared to conventional markets although FinTech has been developing at a rapid speed in the past few years. In this section, we will examine reasons supporting development (subdivided between supply and demand issues) and potential challenges to development.
Development Due to Supply Reasons (Platforms)
FinTech lenders are likely to go further beyond conventional lenders in their use of technology, specifically digital innovations. Greater automation in the loan granting process as well as the use of non-traditional (but relevant) data may lead to more timely credit decisions, thereby resulting in stronger client service.
The use of an online business model for FinTech platforms typically has small upfront costs and may also result in a high level of standardization (i.e., digital contracts not requiring in- person meetings) that would lead to significant cost savings. Of course, there may be limits to the amount of standardization in a given geographical location due to its corresponding legal constraints and segmentation of credit markets.
1. Mark Carney, The Promise of FinTechSomething New Under the Sun? (speech at the
Deutsche Bundesbank G20 Conference on Digitizing Finance, Financial Inclusion and Financial Literacy, Wiesbaden, Germany, January 25, 2017).
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FinTech lenders may be able to operate in the same way as conventional lenders, yet avoid their large fixed costs (i.e., branch banking system, significant IT infrastructure) as well as regulatory constraints (i.e., capital and liquidity requirements).
Finally, conventional lenders have left some business opportunities open to FinTech lenders, including a reduction or discontinuance in lending in specific markets after the most recent financial crisis (or they have not fully exhausted the lending potential in particular markets). It is possible that tax and regulatory incentives pertaining to untapped markets will open the door to FinTech lenders. Additionally, some of those markets may generate excess profits to lenders for which FinTech lenders would like to earn.
Development Due to Demand Reasons (Borrowers or Lenders)
The fact that many customers are now extremely internet savvy and appreciate the ease and timeliness of online banking is a strong argument for the further development of FinTech credit markets. With many younger customers (e.g., age 35 and under) who have always lived in the digital age, there is a huge opportunity for online lending and borrowing. Additionally, with certain emerging markets that are finally entering the digital age, it opens up further opportunities for FinTech credit.
FinTech has a possible opening in the market resulting from the loss of trust in traditional lenders in the aftermath of their failures to provide credit to borrowers during the financial crisis. Also, a sense of social value-added [i.e., peer-to-peer (P2P) lending] may be associated with FinTech lending compared to the profit objective of traditional lending.
FinTech loans may be appealing to investors who view FinTech lending as investing in an alternative asset class that may provide higher returns and lower risk, the latter of which is achieved through a more diversified investment portfolio.
With the greater desire of lenders to lend online, it may eventually lead to borrowers following suit to borrow online given the increased availability in the marketplace.
Possible Impediments to Development
Traditional banks have been in the online banking world for many years and some customers are satisfied with their existing digital banking services and may not be willing to switch to an unknown digital lender.
Growth may be impeded during an economic downturn. To date, many FinTech lenders have not operated through an entire credit cycle of an upturn and a downturn. Therefore, considerable uncertainty exists as to whether emerging FinTech lenders would survive the downturn.
Regulatory requirements may vary widely depending on location and could severely limit the growth of FinTech in jurisdictions where the licensing requirements are overly onerous or where interest rate limits apply. With the ongoing development of FinTech, the related regulations will change and create significant uncertainty for borrowers (i.e., consumer protection) who may feel nervous about online borrowing as a result.
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There is also the generic concept of reputational risk should some FinTech lenders operate in an unscrupulous manner during a sensitive industry development phase when FinTech lenders are trying to create their presence as an alternative source of funds in the marketplace.
Fin Te c h C r e d it Pl a t f o r m s

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