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2015 has generally been an impressive year for the financial industry. Among the greatest developments in the industry is the acceptance of blockchain technology by global financial institutions and growth of fintech companies.

The rapid growth of fintech has been facilitated by the fast adoption of smartphones, mobile applications as well as the internet.

Fintech refers to a form of technology applicable in financial sector. Previously, fintech was restricted to software and PCs used only by financial institutions and companies. This changed throughout the years, and the technology has now expanded to various sectors. The rapid growth of fintech has been facilitated by the fast adoption of smartphones, mobile applications as well as the internet. The revolution of fintech has also been boosted by increased mobile payment methods, social media platforms, crowdsourcing and cryptocurrencies. According to ItProPortal, investments in Fintech sector have increased from about $4.05 billion in 2013 to nearly $12.2 billion by start of 2015.

 

How to lessen risks of fintech companies in providing alternative finance to startups?

Previously, fintech was restricted to software and PCs used only by financial institutions and companies.

 

An article recently published on The Globe And Mail showed that fintech companies are targeting to offer alternative finance services. Many small businesses across the world cannot meet the loan requirements of banks, and therefore they are looking for alternative finance sources.

 Loans can be approved within minutes and funds disbursed to the borrower’s bank account in less than 24 hours.

Fintech companies have the ability to meet these demands for new financial solutions. These fintech companies do  minimal credit checks on borrowers and use technology, complex algorithms and statistics to speed up the loan approval process and reduce turnaround time.   Loans can be approved within minutes and funds disbursed to the borrower’s bank account in less than 24 hours.

Nevertheless, these developments increase risks associated with subprime lending. Most of the smaller loans are unsecured. They are only backed by the creditworthiness of the borrowers, instead of hard collateral. This increases chances of fraud as well as  business and personal bankruptcies.

 

How to lessen risks of fintech companies in providing alternative finance to startups?

Fintech companies do minimal credit checks on borrowers and use technology, complex algorithms and statistics to speed up the loan approval process and reduce turnaround time.

 

According to StatsCan estimations, business bankruptcies have reduced by 0.7 percent in the third quarter of 2015 compared with same period in 2014. However, if more small businesses continue to borrow without any proper credit checks being carried out, then the number of bankruptcies is likely to increase soon.

Fintech stakeholders should take these concerns into account for the sector’s sustainability and viability.

During the launch of  the Small Business Borrowers’ Bill of Rights in August of this year, Michael Barr, former US Treasury assistant secretary, said that the problems starting to rise to the surface of the small business lending industry are very troubling. He also added that these problems may be suggestive of those experienced in subprime mortgage sector during the 2008 financial crisis. Consequently, fintech stakeholders should take these concerns into account for the sector’s sustainability and viability.  

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