The future of fintech

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The financial services industry is changing rapidly, powered by technology. Exponential rises in computing power are driving up business efficiency and driving down costs for end consumers. Sophisticated data processing is enabling a far greater level of service personalisation, and the connectivity of the internet is fuelling disintermediation and facilitating globalisation. All of this is resulting in increased competition.

A number of key technologies are enabling this rapid change. Cloud computing is perhaps the most significant because it liberates financial services companies from the legacy IT systems that have cramped operational efficiency.

Just as importantly, the cloud enables peer-to-peer (P2P) transactions where individual consumers can make commercial deals with other consumers. This process often disintermediates traditional players but allows more agile companies, such as P2P lending provider Kuflink, to develop innovative services.

Cloud computing also drives operational efficiency in the financial services sector. According to McKinsey, use of the cloud increases the efficiency of development and maintenance by 38 percent and reduces system downtime by more than 50 percent.

Another key technology is blockchain or distributed ledger technology (DLT). This technology allows data to be stored and processed securely and synchronously across multiple networks, thus remaining identical for the many different users in those different networks.

DLT is disrupting traditional financial markets by allowing decentralised finance that doesn’t rely on an intermediary to hold and process data and by enabling fintech innovations such as digital wallets, cryptocurrencies and non-fungible tokens to establish increasingly important roles.

Artificial intelligence (AI) is also driving value and innovation in the sector. As well as bolstering efficiency by automating routine banking processes such as payments, AI systems are better at analysing large sets of complex financial information than humans can ever be.

Some human financial advisers who are unable to adapt will be put out of work by AI. But most will be able to provide a better service by combining the personal elements of finance, such as a preference for certain types of investment or risk level, with a more robust, AI-based analysis of financial options.

Moving with social change

Alongside these emerging opportunities for the financial services sector are a set of established technologies that foster mass consumer collaboration, including P2P communication (Facebook, TikTok), P2P selling (eBay, Etsy) and P2P services (Airbnb, Uber).

These technologies are not new: eBay was founded in 1995. However, social change, driven in part by the pandemic, is increasing the potential for mass collaboration services as people become happier working together to achieve mutual goals. This is resulting in the democratisation of products and services as individual consumers capture greater influence on the businesses they engage with.

Another significant change is the increasing importance of sustainability to consumers. ESG (environmental, social and governance) credentials are now accepted as being a fundamental part of a company’s ability to attract investors. As a result, sustainability is a rising tide across all sectors of the financial services industry.

Growth of P2P financial services

An area that is growing strongly because of these technological and social changes is peer-to-peer financial services. P2P lending, for example, has become a huge player in the fintech industry. P2P loans are a modern alternative lending model where companies like Kuflink leverage financial technology to match borrowers and lenders without the need to go to traditional banks.

Over the past five years (2017 to 2022) P2P lending has grown at a rate of more than 20 percent per year. It’s a very attractive proposition to borrowers: they don’t have to pay for the high overheads of traditional banks and so can get offered lower rates. Decisions about loans can be made very rapidly and with minimal paperwork as technology helps to validate applications.

The advantages are strong for lenders, too. Lenders have money to invest. For several years, banks and building societies have been unable to offer good rates to savers: most interest rates on savings accounts are well below inflation, meaning that savers are making a loss on their investments. It is unsurprising that people are looking for new investments that will give them a higher return.

Higher returns normally mean higher risk. However, while P2P lending is not hazard-free (the capital is always at risk), P2P loans can be secured against the borrower’s assets, such as property. In addition, borrowers can be subjected to appropriateness tests that help to confirm whether the borrower is trustworthy and whether the loan interest and repayments will be made.

In Kuflink’s case, these measures significantly reduce the risk to lenders. The company is proud to say that its lenders have never made a loss in more than six years of operation of its platform. So confident is the company in the security it takes that it co-invests up to 5 percent in its Select-Invest loans.

However, the growth of the P2P lending market has not been without obstacles. Late in 2021, P2P pioneer Zopa shut down its lending arm. This service attracted 60,000 investors over its 16 years of operation and its closure was a surprise. The reasons for the change in direction are complex, but one issue seems to have been the regulatory requirements imposed on P2P lending platforms by the FCA.

A question this raises is whether the regulator’s only role is to keep investors’ money safe or whether the market should also give people the option to take fair risks as a way of increasing their returns. Current bank-based savings accounts give savers a guaranteed interest rate, but this guarantee depresses returns substantially. In contrast, P2P lending does not offer any guarantee, but it does provide the opportunity for savers to benefit from higher yields.

Combining lower risk with higher returns 

Peer-to-peer lending is an excellent example of how digital technology is changing the financial services industry. Consumers or small businesses that wish to invest surplus cash can access improved returns on their capital while benefitting from a reduction in risk provided by securing loans against tangible assets such as property.

Borrowers also gain. They can uncover financial opportunities that may not be available through traditional sources and benefit from highly competitive rates.

By leveraging technology to provide benefits for both investors and borrowers, financial services companies in the P2P lending market have established a unique and credible solution in the alternative lending market. Their continuing success demonstrates the importance of digital technology in influencing the future direction of financial services.

To learn more about the opportunities of peer-to-peer lending, visit kuflink.com/peer-to-peer-lending

Originally published on Business Reporter