Fintech is short for financial technology now used in referring to companies that harness advancements in financial technologies, in providing financial services that were traditionally provided only by banking institutions.
Actually, fintechs are now at the stage where they are competing with banks in delivering fast and easy to avail financial services, which ordinary consumers can access by way of smartphones and mobile banking systems.
Many startup fintech companies made waves in 2005, 2006 and 2011 when they ventured into offering student loans. Those were the periods when the general public started to lose trust in banks.
To date, several fintech companies like Lending Club, Prosper and SoFi have expanded, furnishing not only student loans. Currently, they are also offering personal loans, home mortgages, equity loans, as well as offer savings,retirement and trading accounts and investment options.
Already servicing several millions of customers between them, these fintech companies can fund as much as $3 billion to $11 billion worth of loans to the general public on a yearly basis.
Yet that would make you pause and ask, “If they are technology companies, are they licensed to offer loans in accordance with government banking regulations?”
“Are their savings and investment offers backed by insurance agreements like those under the traditional Federal Deposit Insurance Coverage (FDIC)?”
Moreover, “Who provide the funding that fintechs loan out?” After all, fintech companies do not have the same business models as banks, in which the latter lends funds as a way of investing deposits placed by customers.
Forbes Conducts Its Own Investigations on How Fintechs Work
Last December 31, 2019, Forbes Magazine published an article that explains how fintechs operate and who provides the funding. The investigation zeroed in on an FDIC-insured and licensed charter bank called Cross River.
Apparently, Cross River also started out as a traditional bank, which financial technology company called Greensky resuscitated when the bank started failing as aftermath of the 2008 financial crisis.
At that time, Greensky, while still a financial technology development company, was already offering no-interest loans. Greensky offered those loans to property owners who wanted to add home improvements to make heir property highly vendable in the real estate market.
Greensky owner David Zalik later approached Gilles Gade, a French immigrant who until now serves as the CEO of Cross River Bank. Through the charter bank, Gade provided funds for loans originated by GreenSky. At that time, the general public had lost trust on bank-funded loans, while financial technology companies like Greensky offered alternatives.
Sure enough, Cross River became one of several charter banks that grew, by funding loans underwritten for fintech companies. After all, financial technologies now include artificial intelligence (AI) in determining, assessing and managing the risks involved in loan operations.
Many call the funding provided by licensed charter banks as peer-to-peer funding. However, Andrew Marquardt of Middlemarch Partners and former New York Fed told Forbes that investors look at fintech companies as banks. Marquardt corrected this view by saying
”They are just tech companies that leverage technology in furthering an old-school bank solution known as business or consumer lending