There are many successful companies and entrepreneurs in the financial services sector who have already harnessed alternative finance, of which FinTech is an integral part. As a result, the term “alternative finance” has become more popular and widely understood. Alternative finance is a new term that describes any transaction or service that is not credit based. This article will explore what alternative financing entails and how it might be used to benefit consumers in the future.
To start, let’s define what “alternative” means in this context:
When people use this type of finance they do not need to borrow money from a bank or other institution, such as another person or their family member. This requires that the lending be made to a company, organization, or government. They might have to pay back the amount of the loan or investment on time, but it is not borrowed money. (Perhaps an analogy is apt here – when someone buys a lottery ticket, they are not borrowing money from a bank, but they do have to pay it back.)
In practice, alternative finance has evolved into something that could be considered FinTech:
As such, this area of finance is exploding and growing at an exponential rate that few can keep up with. A recent report from Deloitte estimated that FinTech will create 2 million jobs in the U.S by 2022 and generate $1 trillion in revenue for companies by 2020. FinTech is not just a catch-all term for types of applications; rather, it is a collection of companies that are innovating in areas such as: Online account management, Remittance and foreign exchange, Peer to peer lending (peer-to-peer and social funding), Insurance, Mortgage and loan origination.
Not only is the FinTech industry growing exponentially, but its applications are also diversifying. Understanding why “alternatives” have become so prevalent in the financial sector will help you understand the power of alternative finance and how it applies to different industries. Here are two examples that show some of the promising uses:
Investing money for retirement has traditionally been through bonds or stocks. These markets can be highly volatile and unstable, with large amounts of risk being involved. Alternative finance allows for funding that is safer, more stable, and provides a much greater return. For example, alternative finance displaces traditional banks because it is a way of investing money to generate a high return over time.
For instance, peer-to-peer lending platforms allow individuals to lend each other money with interest rates that are lower than the typical savings accounts or bonds. Peer-to-peer lending has become extremely popular in recent years as an alternative to investing in traditional bonds or stocks. The level of involvement of the borrowers’ needs to be minimal; this allows access to capital for those who would not otherwise qualify for traditional programs.
Perhaps the most important use of alternative finance is to provide unbanked, underbanked, or low-income consumers with access to loans. One example of this is Kiva Zip, a lending platform that allows even the smallest donations of $25 to used as a microloan. Since its inception in 2005, over one million entrepreneurs have received more than $1 billion through microloans via Kiva Zip.
This particular example involves using the power of social media to harness the economic benefits of peer-to-peer lending. The platform might require users to set up an account and answer a series of questions before they can begin investing in loans. The lender can review repayment histories, a borrower’s financial history, the purpose of the loan, and much more.
Another example involves loans with no collateral. Peer-to-peer lending also helps individuals secure small business loans without tying it to real estate or other valuable assets. This is cheaper for businesses because they do not have to pledge collateral and it gives them a better chance at receiving funding from alternative finance.
