How ‘fintech’ lending could fuel more bankruptcies

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The Globe and Mail by Talib Contractor | December 11, 2015

fintech-europe-810x550The financial world is buzzing with the new alternative lenders that are transforming the world of finance. But as an accountant who works with companies that have financing issues, this so-called “fintech” boom worries me.

Financial technology (fintech) is a rapidly expanding industry. And profitable – experiencing exponential growth in investment from $3-billion in 2013 to $6.8-billion in 2014. It is comprised of companies that use technology to make financial systems more efficient. Fintech embodies a new set of innovated products that are tailored to the unique needs of small businesses. These include marketplace (peer-to-peer) lending, merchant and e-commerce, invoicing, online supply-chain finance and online trade.

Related: The Future of Financial Services

The fintech industry caters to businesses that provide supply-chain financing as well as alternative-financing models to small businesses and consumers. The alternative lending space has grown rapidly in Canada thanks in part to the success seen in the United States and in London. Companies are now aiming to offer financing arrangements at competitive rates to small businesses and consumers. Some even offer financing to consumers that will allow them to pay off credit cards.

A majority of players within the fintech sector thrive due to the ease and quick accessibility of these loans. Unlike banks, where rigorous and diligent credit checks take days or weeks to approve loans, these start-up ventures shorten their turnaround time by merging technology, social media, statistics and complex algorithms to expedite the loan-approval process. Some of these start-up ventures approve loans within minutes, with funds showing up in your bank account by the end of the day. But these different approaches to check credit worthiness are problematic. Loans may be offered to small businesses or consumers who are not well suited for this type of financing due to their inadequate credit history.

Related: Uber Banking: Fintech Aims to Revolutionize Financial Services in Canada

There are risks on a micro and macro level, too. Potential funding to unfit borrowers combined with the systemic risk of a partially unregulated sector could have a negative impact on the financial markets in the future.

During The Future of Lending Now event held at the Mars Institute last month, Kevin Sandhu, CEO of Grow Financial (previously Grouplend) stressed that federal regulation has not caught up to the innovative practices within the fintech sector.

These smaller loans may be unsecured, meaning that only the borrowers’ creditworthiness supports the loan rather than hard collateral. This opens the floodgates to increased risk of fraud and more personal and business bankruptcies.

Related: Report: Current State of the Financial Technology Ecosystem in the Toronto Region

While StatsCan reports that business bankruptcies have fallen 0.7 per cent in the third quarter of 2015 compared with the same quarter the previous year, that could change. With the increasing amount of alternative financing available, this number could be higher in the future.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support and networking opportunities to over 1300+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more About Us or visit www.ncfacanada.org.

 

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