Fintech Lenders Are Leveraging Alternative Data to Enhance Small Business Financial Inclusion

https://thefintechtimes.com/fintech-lenders-are-leveraging-alternative-data-to-enhance-small-business-financial-inclusion/
https://thefintechtimes.com/wp-content/uploads/2022/04/iStock-1286098079-e1651055719904.jpg?#

Small business lending (SBL) platforms are demonstrating their ability to diminish the financial inclusion gap by utilising alternative and non-traditional forms of data to direct their decision-making. 

SBLs have expanded credit access to underserved small business owners who are not likely to receive funding from traditional lenders, and they charged interest rates that could be comparable with loans from traditional lenders.

This was the primary narrative of new research published by The Federal Reserve Bank of Philadelphia.

Entitled ‘The Impact of Fintech Lending on Credit Access for US Small Businesses‘, the research takes into consideration loans that were approved by LendingClub and Funding Circle, two prolific SBL platforms, between 2016 and 2019.

According to the research, fintech SBL platforms were more likely than traditional lenders to lend to small business owners with a short credit history and those in areas with higher rates of unemployment and business bankruptcy.

The data suggests that said platforms were increasingly leveraging nontraditional forms of data to analyse small businesses and their owners and better direct their lending process.

Doing so could help expand credit access by enhancing the ability of fintech SBL platforms to evaluate credit risk.

Where a traditional lender might consider touchpoints like revenue and the likelihood of bankruptcy, alternative data brings the likes of consumer utility, rent, insurance, property records, employment history and other previous bill payments into the equation; elements typically absent from the traditional lending process.

This research demonstrates the potential of what the fintech platforms and their use of alternative data could do to enhance financial inclusion and overall economic performance.

Data released by iwoca in the immediate aftermath of the pandemic suggested that small businesses were turning to lenders and unsecured forms of finance to make a recovery from the economic devastation caused by the pandemic.

More recent data from iwoca, as outlined in the fintech’s quarterly SME Expert Index, spoke in a more positive tone, and strongly suggested that small businesses were feeling increasingly comfortable with taking on larger loans, and that they were doing so to facilitate plans of expansion.

Overall, banks and fintech lenders are becoming more alike over time, and they are partnering more. In this way, banks and fintech lenders could potentially work together to rebuild the economy during the recovery period.

  • Tyler is a Fintech Junior Journalist with specific interests in Online Banking and emerging AI technologies. He began his career writing with a plethora of national and international publications.

https://thefintechtimes.com/fintech-lenders-are-leveraging-alternative-data-to-enhance-small-business-financial-inclusion/