This section briefly covers a selection of marketplace lending, marketplace financial services, and micro-investing products and services. They are considered disruptive innovations because they rely on technologies such as smartphone apps, big data, algorithms, and machine learning. They use online platforms, instead of legacy infrastructure and can offer nearly identical products and services at a lower cost than traditional lenders and financial service providers offer.
Marketplace lending, sometimes called peer-to-peer lending or platform lending or online lending, is one of the key disruptive fintech business models. According to a recent study by Deloitte External, marketplace lenders accounted for loan originations worth billions over the last decade. These advancements come at a time when bank lending to borrowers with less than pristine credit, small businesses, and startups has stalled.
Peer to Peer (P2P) Lending is a new public market for unsecured consumer debt. Using fully automated algorithm-based pricing and underwriting, P2P lenders directly match borrowers and lenders online. Because P2P lenders use machine learning, their algorithm-based credit decision methods can screen borrowers more precisely. Typically, P2P lenders screen borrowers that have shorter credit histories and lower scores, therefore, they fill a gap that traditional banks ignore.
Peer-to-Peer (P2P) payment systems, whether an electronic or retail system, are seen as easy to use and require minimal personal information. Another benefit is the convenience of making payments from any location at any time. Many consumers enjoy the automated payment feature, which reduces the likelihood of late or skipped payments. While other consumers want to control when payments occur and are wary of payment automation tools. One major drawback for P2P payment systems is the lack of Federal Deposit Insurance (FDIC). Another drawback is their lack of physical location.
Global remittances currently total hundreds of billions annually. They provide a means for a foreign worker to transfer money to someone in his or her home country. Sending money can be costly; transaction fees can cost more than half the amount sent. Mobile remittance service providers use online and mobile platforms to process remittance transactions; therefore, they have lower operating costs than traditional bricks and mortar providers. These features translate into faster funds transmission and lower transfer fees.
Less than one full share of equity (stock) is called a fractional share. In the past, such shares were the result of stock splits, dividend reinvestment plans (DRIPs), or similar corporate actions. Traditionally, if an investor wanted to invest in a stock, that investor had to pay the entire stock price. Owning even one share of stock was out-of-reach for many people. Now, an individual can invest in a fractional share of an S&P 500 stock, bonds, ETFs, or even cryptocurrency. Some brokerage firms are willing to buy whole shares of stock and divvy them out to investors in partial-share increments known as "fractional shares." This allows an investor to buy high priced stock with less cash. The major advantage of micro-investing is an investor can purchase top-line stocks for just a few dollars, thereby making investing more affordable.
The majority of micro-investing brokerages are regulated by the Financial Industry Regulatory Authority (FINRA) and offer insurance against cybersecurity loss.
Robo-advisors typically advise or manage an individual’s wealth. Usually, a robo-advisor has four elements: provide full digital access; perform automated portfolio rebalancing; adopt indexation or passive management, and personalize a customer's goals and behaviors. Because they are typically a free service, they appeal to low-margin clients, and, surprisingly, high-net-worth investors—who are usually a target segment for traditional investment advisory firms. Robo advisors are classified as a disruptive technology because they are cheaper than conventional advisory services, are simpler to access, appeal to new customers, and create a new need among existing clientele.
Mobile remote deposit capture, or mRDC, allows consumers to deposit physical checks by snapping an image of the front and back of the deposit check with their phone and sending it to their financial institution. However, mRDC poses some risks for banks. Fraud risk and unintentional misuse--consumer accidentally deposits the same check twice—are typical financial institution concerns.
Consumer lending in the United States is changing rapidly. Loan origination is becoming almost exclusively algorithmic. A University of California Berkeley study indicates that algorithmic lending seemed to increase competition and made it easier for consumers to shop for better opportunities. Also, because of lower application rejection rates, the study suggests that FinTechs discriminate less than face-to-face lenders.
The following sources from the Internet and from the print collections at the Library of Congress are useful in learning more about FinTech in the banking and larger financial sector.
This is just a selection of books on this topic. The books listed below link to fuller bibliographic information for each item in the the Library of Congress Online Catalog. Links are provided for additional online content when available.