Fintech companies are all the rage right now and promise to “say yes” if your bank says no. But are they always the best option, or are they actually failing small businesses? In this article, we discuss what fintech is, how it compares to traditional banking and the pros and cons of fintech lending.
What is Fintech?
Fintech, also known as Financial Technology, is simply a category of technology that seeks to improve and automate the financial services industry, including software, apps, and other technologies. The intent is to create services that are more accessible to business owners by using specialized software and cutting out the “middle man,” — the bank lender.
Many consider fintech a new development, but at its most basic definition, modern fintech started in 1950 with the advent of the Diner’s Club credit card. This product eliminated — or at least reduced — the need to carry physical currency to purchase products.
In the late 20th century, the term fintech applied to the back-end processes of bank mainframes as online banking and electronic trading, or e-trading emerged. Then, as Near-Field-Communications (NFC) chips and mobile phone apps developed, they revolutionized the concept of banking and payments, and fintech evolved yet again.
Types of Fintech Companies
Today, there are several different types of financial technology companies, but many can be categorized into the following: payment processing, cryptocurrency, stock trading, budgeting, and financial lending and banking. We’ll briefly discuss these different types and focus on the lenders.
- Payment processing: Popular companies like PayPal, Stripe, and Venmo are used almost ubiquitously for making payments to companies and individuals.
- Cryptocurrency: Many believe that bitcoin and other cryptocurrencies are the way of the future. Whether that occurs or not, we’ll have to wait and see, but it’s clear that fintech companies are popping up all the time to sell, buy, and trade crypto.
- Stock trading: Gone are the days when stock trading was reserved for Wall Street professionals. Today, anyone can buy and trade stock with companies like Fidelity and E-Trade.
- Budgeting: Few people (aside from us) enjoy crunching numbers and being accountable to a monthly budget, but it is necessary. To help with this laborious task, several companies created apps that help people take control of their budgets.
- Lending and Banking: Online lenders and banks have become very popular in recent years and offer businesses alternative solutions, but it comes at a price, as we’ll discuss in the next section.
Fintech vs. Banks: What’s the Difference Between Fintech Companies and Other Lenders?
Fintech lenders and banks have the same core purpose: to offer banking and lending solutions to individuals and small businesses. There are many different types of fintech lenders and banks, so a full comparison is beyond the scope of this article. However, here are some of the main differences.
- Technology: As the name implies, financial technology companies go heavy on technology. The entire industry tries to be on the cutting edge of technology and innovative ways to utilize existing technology. Whether it’s cloud computing, machine learning, or AI, fintech is always seeking the latest and greatest.
- Regulation: Banks and credit unions currently have more regulations to abide by. This is one reason there has been a surge of fintech lenders in the last couple of decades. Fintech lenders are regulated by local, state, or federal agencies, but it varies depending on the services they offer. This enables fintech firms to adapt to technological changes faster, but some consider them to be riskier than banks.
- Experience: Fintech lenders, unless partnered with another financial institution, are entirely online. The applications are online (often automated to a certain extent), the communication is online, everything is online. With banks, you get online access — as most banks have online and mobile banking — but there is a physical store and/or a dedicated support team.
The Pros of Fintech
Although the point of this article is to highlight the often unspoken downsides of fintech, we would be remiss not to highlight the positive slides. Here are some of the positives of fintech.
- Easy applications: As mentioned above, fintech applications occur entirely online and are sometimes automated. The attraction of these applications is speed — they can be completed fast and easily.
- Quick approvals: Some fintech lenders have low requirements. Someone with a 600 credit score (or even lower) may have an easier time getting approved for a loan from a fintech company rather than a bank.
- Adaptable: Because fintech companies are always utilizing or researching the latest technology, fintech companies are usually on the cutting edge of new baking and lending methods.
The Downfalls of Fintech Financing
Financial technology certainly has its benefits, but rarely do you hear about the challenges of doing business with such companies. Below are the downsides that can occur when seeking a loan from a financial technology lender.
- No lasting relationship: Many fintech companies are quick to lend but slow to develop a lasting relationship. Their priority is on landing the sale. With lenders like Midwest Business Funding, and even traditional banks, the relationship is foundational.
- Limited support: Similar to above, without a lasting relationship, those that procure loans from fintech companies can find themselves without support, or little support.
- Lack of physical location: Because fintech companies operate entirely online, they do not appeal to those that prefer a physical location to visit — even on occasion.
- Less regulation: Many may regard this as a positive, but with less regulation can come an increased risk of security and privacy issues.
- Impersonal funding: As mentioned before, many fintech companies boast the ability to provide fast funding, but the financing they approve may not be in the borrower's best interest. Quality can succumb to speed.
The Midwest Business Funding Difference
At Midwest Business Funding, we offer a variety of alternative lending solutions for small and mid-sized businesses. We believe in a personalized lending process, not a one-size-fits-all approach. Every business is different, as are their needs, so the approach and care should be different.
Typically, our clients cannot obtain financing through traditional lenders, which we have in common with popular fintech companies, but the main difference is our approach. We truly care about the success of our clients, which is why we foster partnerships and create funding strategies that set them up for success. Plus, the mentorship we provide is something you just can’t get from fintech companies.
MBF Business Funding Options
When you choose MBF as your lending partner, you have the opportunity to explore the below options.
- Equipment financing: If you need to purchase equipment for your business, our equipment financing options have lower upfront costs and flexible and convenient financing.
- Factoring: Factoring, or invoice factoring, is a straightforward way of accessing capital by using your invoices as collateral. We are small business friendly and have flexible payment terms.
- Investment real estate lending: We provide short-term loans for single-family or multi-family investment projects to help you reach your goals.
- Quick capital loans: Sometimes things happen, and that’s what this loan is for. These short-term loans are similar to lines of credit and are based upon monthly cash flow.
Final Thoughts On Fintech
Fintech companies can work well for many people and businesses, but oftentimes they fail small businesses because they don't put in the time to determine what’s best for the customer. If you want fast approval without lasting support or mentorship, fintech lenders are the route to take.
If you want a lender that hears you, understands your situation, and can partner with you to provide the best solution, that’s where Midwest Business Funding comes in.