Digital Finance Platform Innovation and the Effect on Lending

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Over the past few years, we've come to realize that lending is no longer constrained to the doors and floors of a bank. Now, with the power of digital platforms, we can lend and borrow through online companies at the swipe of a smartphone. This freedom has significantly impacted the lending and banking as industries, most notably the ability of individuals to obtain loan products. And this is great for consumers and financial institutions alike. In this article, we want to explore how peer-to-peer lending increases the adaptability of financial systems around the world.

Share of the Lending Market

The market share of lending is shifting banks to alternative lending providers. This isn't to say that traditional bank as we know it will evaporate; however they are facing an interesting inflection point.

American Banker reported that banks now control less than 25% of mortgage lending despite the low-interest rates they can offer. As a result, banks’ lack of agility and customer service in many verticals has given rise to an entirely new, disruptive method of financing.

As alternative lending enters its third-generation, companies like SoFi and Lending Club are paving the way for businesses to access the funding they need.

Further, alternative lenders are growing exponentially across all lending verticals; not just personal loans offered by SoFi and Lending Club.

According to reports, alternative mortgage lender Rocket Mortgage would rank as a top 30 lender if it were a traditional bank.

Innovation Drives Growth

Innovations in financing and the higher quality of customer service are redefining the way that modern companies transact.

Student-focused lenders have shown enormous growth with loans issued growing from 2-million dollars at the end of 2011 to roughly 14-billion dollars at the end of the 3rd quarter 2016 according to a study by S&P Global.

SoFi, Prosper, and Lending Club are among the top three compound annual growth rate peer-to-peer lending services. S&P Global shows that Student-focused platforms like SoFi, Earnest, and CommonBond have grown rapidly, but they are still second to personal lenders.

Regarding the cumulative originations for the 13 companies analyzed in the S&P Global report, personal lenders accounted for 60.7% of origination since inception compared to 23.3% for student-focused lenders and only 16% or small-to-medium business lenders.

Areas of Innovation

Digital lenders are effectively reducing the time required to obtain a loan or mortgage. Underwriting has become more automated through powerful algorithms and big data.

We've already discussed mortgage, personal, and student loan services above, but there are many other areas of innovation in the digital financial platform niche.

For instance, consider RealCrowd, a commercial crowdfunding lender who provides "investors the same direct and free access to commercial real estate that institutions, pension funds & university endowments have always had."

And these types of services are funding loans quicker than traditional banks. For instance alternative lender SoFi will fully underwrite your loan in the initial approval phase.

This has allowed digital lending services to attract not only significant attention and financial backing, but also allowed for a much more agile and innovative industry.

A shorter time to funding means a shorter time to market for financial products.

Innovation is the lifeblood of every industry. When they fail to innovate, they are replaced.