Fintech Versus the Traditional Banks
When many people think of fintech, they think of the online banking apps that are challenging major banks. Startups like Monzo, Revolut, Varo, and Chime emerged to offer online banking services through account holders’ smartphones. There are other types of fintech startups, but the banking apps are challenging well-known banks like JPMorgan Chase, Bank of America, Citi, and their peers, so they’ve attracted lots of attention. Here are a few of the unique services that these startups offer.
Alternative Lending Standards
Banks consider a borrower’s credit score, employment history, current employment income, and other factors when they decide whether to underwrite a loan. Fintechs don’t have to use traditional underwriting criteria. Some of them ask borrowers for permission to install data-mining software on their smartphones, and then use machine learning software to analyze the smartphone data. By considering data points such as the borrower’s text messaging history and app usage, these banks can build an alternative credit score that allows borrowers without credit histories to take out loans.
Tools like this are very popular in developing countries where many people don’t have bank accounts. In Mexico, the lender Kueski is using technology like this to make loans. Many Mexican workers use cash to make purchases and don’t have bank accounts, but Kueski can use its fintech software to loan them money anyway by analyzing their mobile devices. After borrowing money from Kueski, these workers build up credit scores that qualify them for more traditional loans from other banks.
Earned Wage Access
Earned wage access is another fintech service that’s very popular with lower-income workers. When a neobank offers this service, employees don’t have to wait two weeks to access their paychecks. They can spend as much as half of their earnings immediately. The bank simply advances the money to the employees and then deducts the money from their paychecks afterward. The government doesn’t classify these short-term cash advances as loans because the worker’s already earned the money that the bank is providing to them.
Employers may offer earned wage access to differentiate themselves from other minimum-wage employers without having to raise wages. When this happens, the company often pays the early wage access fees to the fintech. There are also banks that offer earned wage access to employees who sign up for the programs themselves. These programs often charge the employees fees to access their paychecks early. Branch and Clair are examples of fintechs that offer this type of service.
Automated Budgeting and Investing
Neobanks can help you optimize your spending. They can use machine learning software to analyze your bank account history, learning when you have enough cash to buy luxuries and when you need to conserve it to pay upcoming bills. They can even calculate how much of your paycheck you can safely invest. Several fintech startups offered this service by itself in the past, but now it’s becoming a more common feature at less specialized neobanks.
The apps that automatically invest your money in a stock portfolio often do it through partnerships with third-party stock brokerages. These brokerages might be separate from the third-party bank that manages the fintech app’s checking and savings accounts. As a result, the bank might not transfer money over to the brokerage instantly. Unifimoney’s set up like that. If the brokerage does allow you to make trades as soon as you authorize a money transfer, it’s providing a margin loan because the transfer hasn’t cleared yet. Robinhood’s set up like that. This topic became very relevant during the recent GameStop rally. Creating margin accounts for all new users is a powerful growth hack because it allows the users to trade immediately. But the brokerage can call in the margin loans and sell the stock if it needs more liquidity, and investors might not get a good price for their shares if that happens.
Neobanks offer some very useful services. They can loan you money even if you normally wouldn’t qualify for a loan because of a lack of credit history. They also provide alternatives to taking out loans. Employees of major retail stores like Wal-Mart and restaurants like McDonald’s can use fintech platforms to access their paychecks several days before payday. And they can also help you optimize your budget and even automatically invest part of your income for you, setting up brokerage accounts that may also allow self-directed trading.