Fintech Lending Is on the Rise Globally but Policymakers Must Watch the Space Closely to Protect Consumers: Report

Demand for Fintech services and loans have surged in India this year, according to local news outlet Live Mint. The credit flows of Fintechs and Big-tech firms have increased significantly during the past few years in highly developed countries.

Commercial banks have emerged as leaders when it comes to lending for longer or extended  timeframes. But can Fintechs and Big tech companies offer comparable products and services?

During the past few years, the trend of Fintech credit and lending by tech firms has really picked up. A recent study by Guillio Cornelli (and his colleagues) of the Bank for International Settlements reveals that these alternative forms of lending have grown considerably in areas with unmet demand for credit and also where appropriate institutional framework or infrastructure exists.

Fintech lenders typically provide credit online and are not run by traditional or commercial banks. Meanwhile, Big tech lending involves large firms like Amazon and Google providing credit or financial assistance (but their main product offering is digital technology services).

The study by Cornelli and his colleagues noted that last year, the value of Fintech credit and Big tech credit was around $223 billion and $572 billion, respectively. The report’s authors found that there were several demand factors that led to increased adoption of these new lending models across different global economies. For instance, in developed countries, the demand for credit remains quite high, which creates more opportunities for Fintechs. Countries with fewer physical bank branches or with costly or inefficient banking services also had greater demand for Fintech-based credit solutions, the study confirmed.

The research study further noted that countries with proper regulatory frameworks and guidelines for Fintechs and Big tech lending make it a lot easier for these services to expand, while strict or inflexible banking regulations may hinder their growth and adoption.

The study’s authors stated that these new Fintech lenders in the credit space are often not included or considered in a country’s official credit statistics, which can be problematic because it can become more challenging for regulators to monitor these activities.

The study also warned that the fast-growing credit market involving such companies may endanger or expose financial systems to various systemic risks. The authors recommended that policymakers should monitor or keep a close eye on these nascent markets in order to better assess their risks and future potential.

Online lenders are now a rapidly growing Fintech segment. As reported recently, UK-based digital banking and online lender Zopa aims to generate profits in 2021, and will compete with Revolut, Monzo, and other European challengers.

Indian Fintech U GRO Capital, an online lending platform for SMEs, reported over $2 million in net profit for the current FY. Fintech lending in Indonesia is also on the rise, but it might not be able to fully support participation from retail investors.

India’s consumer lending platform ZestMoney revealed, earlier this year, that the country’s severe lockdowns led to “almost complete cessation” of economic activity.

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