Fintech lending: where we were, where we are, and where we’re going
First published on Medium.
In September, our team at Ocrolus announced $80 million in Series C funding led by Fin VC and unveiled our new website. We’re thrilled to welcome our new investors to the Ocrolus family and couldn’t be more excited for the journey ahead in fintech lending!
What we do at Ocrolus is ‘superpower’ lenders with the ability to increase and streamline access to critical financial services. By enabling lenders to more quickly analyze diverse sources of financial data, Ocrolus levels the playing field for every consumer and business, providing expanded access to credit at a lower cost.
It’s fascinating to reflect on our Series C funding and how a (still nascent!) category of B2B infrastructure tech is revolutionizing access to financial products for the masses…
Where we were in fintech lending.
- Historically, banks have prioritized consumers and businesses who have lots of money. The more money you have – the better treatment you receive. It is notoriously difficult or impossible for individuals and small businesses with limited credit history to access capital.
- Fintech lenders emerged in the 2000s to provide funding to subprime consumers and ‘thin-file’ small businesses.
- These lenders (Frank Rotman of QED Investors calls them ‘The Brave 100’) dared to believe that cash flow data was a better predictor of financial health than traditional credit scores.
- But the cost of capital for the first wave of fintech lenders was expensive and the risk models developed were unproven, resulting in extremely high interest rates for borrowers. Nevertheless, borrowers were happy – accessing funds at interest rates ranging from 25-35% was better than not being able to access funds at all.
- It was also expensive and time consuming for fintech lenders to process new loan applications. Unlike banks with existing customer relationships, fintechs needed to experiment with a variety of marketing and partner channels to find customers. To process incoming applications, fintechs had no choice but to employ teams of back-office workers to review and analyze documents.
- Less than 1% of loans in the world were made online.
Where we are now with fintech infrastructure
- Fintech infrastructure technology like Plaid and Ocrolus emerged, enabling lenders to evaluate borrowers instantly or within minutes, often with fully-automated application flows that run 365/24/7.
- Tech-forward lenders embrace the use of APIs for fraud detection and credit decisioning. Borrowers sing the praises of smooth, online application processes.
- Large, innovative financial services firms like Stripe and Square cross-sell lending products. Even non-financial companies with proprietary data ‘embed’ lending in their products, building upon enabling fintech infrastructure.
- Cost of capital has gone down, as credit cycles proved the viability of fintech lending models. Some fintechs have even applied for or acquired banking charters.
- The pandemic hit, and traditional credit scores became somewhat irrelevant overnight. Banks realized that evaluating a borrower’s income, cash flow, and other data was becoming essential for credit decisioning.
- The Paycheck Protection Program reinforced the notion that banks often prioritize their biggest customers, leaving small business owners out to dry. Meanwhile, fintechs demonstrated the ability to fund more than $65 billion in an unbiased way to a diverse set of business owners, processing loans in as little as 8 to 12 minutes.
- Our research demonstrated that black-owned businesses were 12.1% more likely to obtain PPP loans from a fintech lender than a traditional bank.
- We also found that traditional banks substantially increased their share of funding black-owned businesses after automating their lending processes.
- Upstart, an AI consumer lending platform, went public in December 2020 at an initial market cap of $1.45B. As of November 2021, the company is worth over $20B.
- Better Mortgage, a digital-first homeownership company launched in 2016, plans to go public this quarter at a valuation close to $7B.
- PayPal is now larger than practically every US bank.
Where we’re going
Since the Ocrolus Series C funding announcement, we’ve made many predictions about where we’re headed in the fintech lending landscape.
- Borrowers demand an online process and fast access to capital. Lenders who create easy-to-use digital customer experiences will drive loyalty and win market share.
- Consumers will care less and less about the perceived security of working with ‘a bank’ and will gravitate towards embedded and verticalized financial products.
- Artificial Intelligence (AI) will be used more prevalently to power credit and risk functions.
- Document Automation will continue to help lenders broaden their acquisition funnels and be more aggressive in marketing.
- Modern scoring models will continue to reduce bias in lending, and will help lenders say YES more often.
- Cash flow and income-based scores will replace traditional credit scores.
- Ultimately, every consumer and small business should be able to access financial products online — quickly, efficiently, and affordably.
Ocrolus is in the right place, at the right time to help further democratize access to financial products. We’re a fintech lending process automation platform building next-generation credit scoring tools focused on income and cash flow analysis. We’re looking forward to this next chapter of growth at Ocrolus, and to leveling the playing field for every consumer and small business.