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Fintech and P2P lending have been around for almost a decade now, but in the context of Covid-19 and mass unemployment in the USA, their impact is being felt more than ever. This is because many of the startups in the Fintech sector are focused on closing the opportunity gap by providing alternative sources of finance to people who find it difficult to borrow through traditional channels.
The precipitous rise in the number (and market capitalization) of this type of startup has led some to claim that we are on the eve of a financial revolution: that Fintech could help us build a fairer economy, especially when it comes to racial and ethnic minorities who still find it difficult to borrow.
A certain level of skepticism about this is understandable. Bitcoin, for instance, was once talked about in the same terms. But let's keep an open mind. In this article, we'll review the socially-conscious Fintech sector, and consider whether P2P lending – coupled with tech – can transform our economy for the better.
The concept of peer-to-peer lending has been around for more than a decade now. The two biggest companies in this space, Prosper and rival Lending Club, both launched in the same year. Despite the 2008 economic crisis and a host of regulatory issues that followed, the two have emerged as credible financing options with a high level of demand from consumers.
P2P lending relies on a slew of technological innovations. Advances in multi-factor authentication (MFA) have allowed Fintech firms to safely work with the personal details of thousands of customers, and improved networking technologies allow for extremely small amounts of capital to be lent and tracked.
For business, advanced invoicing software can now be used in an integrated environment with financial applications to easily track employee timesheets, operating capital requirements, and returns on business investments.
Though the primary value of P2P lending and Fintech products remains one of convenience, some have seen the P2P model as facilitating a way to fundamentally reform the way in which the economy works. By reducing the power of huge financial corporations, they argue, P2P lending offers a way to "improve and automate the delivery and use of financial services," and to re-invent the financial sector in a way that provides fairer access to capital.
There are many fintech startups that are explicitly focused on this project. OnDeck is a company that provides business loans to small business owners who find it difficult to borrow from banks. Fundera offers a kind of Kayak for small business loans: a platform that shows potential borrowers all their options at once.
When it comes to wealth management, companies like Wealthfront and Betterment now provide automated portfolio management at prices they say are cheaper than traditional money managers, and Lenda is attempting to transform home loan financing with a service that runs entirely online.
All of these platforms offer a number of advantages over traditional approaches to lending. The cloud storage technology that underpins them makes financial transactions quicker, more efficient, and arguably more secure.
The flexibility provided by this technology also means that P2P lending might offer a far greater level of agility than traditional finance infrastructure, which is especially relevant in the context of the global pandemic.
Perhaps most importantly, however, these platforms might be able to overcome some of the intersectional discrimination that still haunts large, established, financial institutions.
All this said, there remain a number of challenges that will need to be overcome in order for P2P lending to realize it's potential. These challenges can be broken into two main categories: one technical, and one institutional.
First, the technical challenge. Many of the platforms that have been built to facilitate P2P lending have prioritized ease of use over cybersecurity, and because of this, they are a major target for hackers. Even where such platforms are made secure against criminal intrusion, the creeping level of surveillance of our online lives, both by certain governments and online advertisers, means that many people remain hesitant to move much of their financial lives online.
Platforms that suffer from data breaches and malicious software, or that are required by law to open their books to governments, are unlikely to ever realize a more just economy. Even worse, most of these platforms are hesitant to move much of their financial activity online and require the use of more advanced online security tools for safety.
The second issue is one of fragility. Though the institutional inertia (and discrimination) that characterizes large financial institutions have reduced the ability of these firms to respond to short-term financial crises, they still offer one major advantage over fintech startups: they are "too big to fail".
In order for the P2P sector to truly build a better economy, it will need to be backed by government assurances – if it is not, we run the risk that the next big financial crisis will bankrupt more small businesses than the last, as investors panic and renege on their loans.
Predicting the future of any form of tech is, of course, difficult. Nevertheless, some trends remain fairly clear. One is that, as the tech sector becomes more diverse, tech startups of all kinds – including in the Fintech space – are going to become increasingly focused on social and economic justice.
The other is that, in the context of the current pandemic crisis, project managers are seeking new ways to secure capital. And it might just be that the combination of these two factors might, finally, give rise to a financial sector that is more socially responsible. At least, we hope so.
