Change Says “I am inevitable”. Yes, as like other business consumer credit has also gone through many changes in its history of 5000 years but the recent technological advancement makes rapid changes in the consumer credit industry. Now people can get their easy logbook loans just by swiping their mobile phone. The digitalization of the credit industry paves the way for different types of loans. I have summarised the major changes that happened with technological advancement and innovations.
Mobile wallets and microloans:
The innovation of mobile wallets apps like Google Pay, Paytm, etc… have reduced the cash transactions. Thus loan credits were transferred to their mobile wallets and they use them frothier day-to-day purchases. And when they deposit or bring money inside their wallet the loan is repaid with interest. Thus the mobile wallets provide short term loans with micro amounts that start from 2000 or 5000 based on their Account. Thus people can meet their month-end bills with the loan raised from the mobile wallets.
Mobile phones make the internet available for people around the world, thus it leads to the creation of websites and money lending platforms by the local money lending companies and private individuals. The money lending platforms avoid barriers like person-to-person contact and bulk paper works which are present in the traditional way of borrowing. Now people can get their personal loans, education loans, house loans, mortgage loans from the home. The only thing they need to do is to register in those companies’ websites and provide the requested information then their loans will be provided to them within the next 24 hours.
It is the new method of obtaining a loan by eliminating the middlemen or third parties like banks and financial institutions. People can register in a P2P market place as a borrower/lender and they can see a list of other peoples who are interested to lend/borrow money they can make deals with them. They can even negotiate the terms of payment with the other party without third parties or broker commission.
Changes in Bank terms:
Banks are the major source of credits for many investors and individuals. But the recent technological advancements make the traditional banks to struggle hard to survive. As people have many opportunities to get credit the survival of the traditional and small scale banks becomes questionable. The development of Fintech companies and other freelancing money lending platforms makes the banks change their terms and conditions to survive the competition. Normally traditional banks will take 4-8 days for taking decisions for providing loan and short term loans were needed to repay within 3 months. But now peoples are very fast this time will make the banks hard to survive.
Thus the completion forced banks to change their terms and policy. And the banks are needed to be digitalized to meet the online competition. Thus many banks started to open their own Net banking Portal. They also need to adapt to their host country’s cultural norms, languages, and government policies. For example, they need to develop their online portal on local languages. In order to sustain in the competitive market, many banks were merged with other banks or signed a partnership deed with existing Fintech companies.
Changes in credit score calculation:
The credit score is a numerical expression that denotes the creditworthiness of the individual. Credit scores play a major role in decision making. It is obtained from the credit reports, and information provided by the credit bureau. Traditionally credit scores are calculated based on logistic regression by correlating the financial behaviors of the individual like Payment History, Debt Burden, Types of Credit Used, Length of Credit History, Requests for New Credit. Using this information a score of three-digit number calculated which is between 300 and 850. The credit risk of the individual categorized based on this score as below.
|300 – 599||Very Bad|
|600 – 649||Poor|
|650 – 699||Fair|
|700 – 749||Good|
|750 – 799||Very Good|
|800 – 850||Excellent|
Credit score calculation may differ from one type of loan to others. For example, a Credit score calculated for a car loan may differ from the house loan.
The technical advancements make the loan provider get all the information about the financial behaviors of the individual in different time periods. Credit score calculation is improved by 20% by this information and by two new innovative methods of calculation.
It includes the financial behavior of the individual at different times in the past to determine future opportunities and risks. Thus provide a bigger image for decision making.
This provides more information than the traditional method which includes alternatives like his Real property and ownership, family wealth, social prestige, etc…
Introduction of AI in decision making:
Instead of making decisions by the managerial team the decision made by an Artificial Intelligence Computer. It reduces the cost and time for decision making. But the introduction of robots or AI for credit score calculation and decision making is now at the starting phase, it will be starting to rule the credit industry soon.