5 Types of Fintech Business Models
Fintech Credit market lacks a globally accepted format. The heterogeneity has led to the development of quite a few business models that are functioning in the industry world over. While we’re sure these will change over the years as Fintech becomes more established and focuses on developing risk and fraud management, these are the 5 types of Fintech business models.
1) Traditional P2P lending model
There are three key players in the traditional P2P model. The creditor, the borrower, and the intermediary platform. The borrower applies for a loan and is expected to provide the necessary documents and financials of their organization. The role of the lending platform in between is to appraise through the organization and all the documents.
Once the due diligence is over, the request is published on the portal for creditors to see. For a better risk management, platforms usually help the investors while making a decision. In Europe, most of the platforms use auto-selection functionality. In Japan, the platforms loans are package and then only offered to the retail investors. Many portals in Australia, China, Italy, and Korea demand a guarantee or provision fund from the borrowers. Portals charge a nominal fee out of the total funds raised.
2) Notary model
This model is most commonly used in Germany and Korea. It is also very popular in the USA. Under this model, the borrowers and the investors are brought together by the intermediary platform. However, the loan process is initiated and sold by a licensed and authorized bank. The method is majorly used due to regulatory restrictions and licensing rules for non-authorized institutions that want to get involved in the financing business.
3) Guaranteed return model
As the name suggests, under this model the lending platform gives a guarantee of the principal amount invested and interest money. The model is popular in China. Indeed, a specific platform in China announces a guarantee of 12% interest rate, regardless of how risky the investment is. As of August 2016, the Chinese government has announced a ban on such lending methods.
4) Balance sheet model
Unlike the traditional lending, the loans raised under this model are not only originated by the lending platforms but also retained in their balance sheets. Therefore, in a way, the investors are indeed extending the loan to the platform itself, and they receive the claim directly from them. The method is popular in the USA, Australia, and Canada.
5) Invoice trading model
Under this model, the borrowers sell their invoice to the lender at a discount to raise immediate funds. This model is further divided into two types, that is, non-recourse and recourse. In the non-recourse model, the lender not only extends the liquidity but also takes up the ultimate risk of any default happening from the debtor’s side. Alternatively, with recourse method, the risk of default stays with the original creditor.
As the Fintech market grows even stronger, the business models will all undergo changes to adjust to the industry’s demand.