The past decade has seen a considerable disruption of the traditional banking industry, especially in the areas of payments, lending, wealth management, and retail banking. 

Innovative financial services for loan origination (consumer and business loans) have increased significantly over the last 5 years.  In 2020, the global alternative credit market had a transaction value of US $291.4 billion. During the COVID-19 pandemic, it skyrocketed even further thereby increasing the opportunities available to both lenders and consumers. 

The growing alternative lending trend has ushered in new plans for the SBA to add to its lending network; and also increased the need to address Creditors’ Rights with the growing lending options.

The Alternative Lending market is split into Crowdlending (Business) and P2P Marketplace Lending (Personal).

Crowdlending platforms enable SME’s to get loans from private and institutional investors via an online brokering platform. Businesses can obtain small loans up to a set maximum value. As a rule, financing requests are analyzed by the provider via an internal scoring system and are checked against additional minimum requirements such as turnover.

Marketplace Lending platforms offer private users the option to place requests for loans in an online marketplace to find private investors who would invest at an appropriate interest rate. Portals such as Prosper apply a credit score and list the financial requests by intended purpose before fixing a lending rate. One or more investors can then serve the credit request.

In 2020, the global alternative credit market had a transaction value of US $291.4 billion. From an international perspective, comparing the three major regions U.S., China and Europe, the size of the Chinese Alternative Lending market is remarkable – with a volume of US $251.9 billion, China accounted for 86% of the global market in 2020. 

Disruption of the traditional banking industry, especially in the areas of payments, lending, wealth management, and retail banking, is the new normal.

Interestingly, this change has not been limited to financial technology (FinTech) start-ups. Large technology and eCommerce companies such as Google, Amazon, Facebook, Apple, Square and Alibaba have managed to leverage their massive reach and technological capabilities to pose a stiff challenge to competitors.

The FinTech industry as we consider it consists of five segments: Digital Payments, Neobanking, Alternative Financing, Alternative Lending, and Digital Investment.

The digital payment and lending businesses, including mobile wallets, P2P payments, alternative lending, cryptocurrencies, and robo-advisors are now finding mainstream acceptance in both developed and emerging countries.

Broadly speaking, there are three types of players in the digital commerce payments market:

1. Providers with their own wallet such as Venmo and PayPal,
2. online payment interface providers such as Stripe,
3. and B2B offline payment providers such as Square.

These providers make money by charging fees for each transaction, which is usually paid by the merchant.

Blockchain is a distributed ledger technology that can be used to execute, store, and verify transactions of every kind. It is mainly used for money transfers, buying and selling stocks, insurance contracts, and buying and selling physical goods and/or energy. Global investment in blockchain and cryptocurrency start-ups that included VC, PE, and M&A fell marginally in 2020 due to the COVID-19 pandemic to US$4.3 billion, as compared to US$5 billion in 2019. However, investments have grown exponentially in the first half of 2021 and were valued at US$8.7 billion by the end of June.

Cryptocurrencies are probably the most well-known adoption of blockchain technology. Bitcoin, which appeared in 2009, is by far the oldest and the most widely used cryptocurrency in the world.

Women-Owned: Throughout history, women have had to overcome many challenges and stereotypes to establish themselves in leadership positions. However, as has been the general trend across industries over the past decade or so, women have not only started to assume more leadership positions in established companies but have also founded more start-ups that offer innovative products borne mainly out of their own frustrating experiences. Ellevest, CNote, Omnius, and Penta are a few examples of FinTech start-ups founded and led by women.

Holding Companies: Ant Financial, the most highly valued FinTech company in the world, is the holding company of Alibaba’s financial products. It operates in various business areas including digital payments (Alipay), business finance (Ant Micro Loan), marketplace lending (Ant Check Later), wealth management (Ant Fortune), online banking (Mybank), and insurance and credit reference (Sesame Credit).

The transition from Merchant Processor to Alternative Lender

Square started out in 2009 as a platform that offered a dongle so that businesses could accept card payments. The company has since evolved to become a provider of end-to-end solutions such as software, hardware, and financial services – including loan processing – for sellers. It also provides a parallel financial services ecosystem that enables people to store, send, receive, and invest their money.

The U.S. leads in the number of FinTech companies globally

Specifically, most of the prominent U.S. FinTech companies are located in California and New York. We have a closer look at some of those prominent U.S. FinTech start-ups: Venmo, Stripe, Ondeck, Lending Club, Prosper, SoFi, Betterment, and Wealthfront. Although they offer services in the same segments, their specific conditions and features vary a lot. For example, in the marketplace lending segment, SoFi offers personal loans with no origination fees whereas its 1-6% for LendingClub and Prosper.

Robinhood and SoFi are the two most well-funded FinTech start-ups in the U.S., with fundings of US$5.6 billion and US$3 billion respectively. Robinhood is backed by key investors such as Frontier Tech Ventures, Index Ventures, Ribbit Capital, and Social Leverage whilst SoFi is backed by Baseline Ventures, DCM Ventures, and Discovery Capital. Kabbage and Stripe are next in line, with a funding of US2.5 billion and US$2.2 billion, respectively.

A number of U.S. banks have made FinTech investments, with Goldman Sachs leading the pack with 20, followed by CapitalOne (13) and Citigroup (12).

Innovation Hubs:  Additionally, banks have also established innovation hubs focusing on various areas such as mobile banking, blockchain and cryptocurrencies, wearables, Internet of Things, next-generation commerce, authentication, biometrics integration, augmented reality, and big data.

The SBA plans a big change for its lender network

This recent Business Journal explains what it means for businesses as the SBA expands its lending network to accommodate alternative lending options.

Next Gen Creditors’ Rights

As a Creditors’ Rights and Collections Attorney, Saldutti Law is prepared for the effective processes necessary to address the increase in late and default payments. Banks, credit unions, and alternative lending sources should explore their Creditors’ Rights and Collections processes while ensuring they maintain compliance requirements.

If you’re a bank, credit union, or alternative lending source that would like to explore collections options, speak with a Creditors’ Rights attorney at Saldutti Law Group to discuss your line of credit and loan workout efforts. 

SOURCE: Statista – Fintech Report and Alternative Lending Report

Saldutti Law is a creditors’ rights and debt collection law firm. Saldutti Law specializes in the areas of creditors’ rights, banking law, SBA loans, loan workouts, lease recoveries, real estate foreclosure and rent collection, bankruptcy litigation, judgment enforcement, commercial collections, complex litigation, and forensic investigations.