The New Lending Industry Word Salad
An Exploration of Some of the New Terms and TLAs
Introduction
Whoever said that the lending industry is boring and never changes clearly isn’t up to date on their reading! With the exponential growth of fintechs and mobile lenders over the past decade, a whole plethora of new products, terms and TLAs has emerged.
If all of this is confusing, there is no need to fear, as I have put together descriptions and explanations of some of the more commonly used terms in what has become the new lending industry paradigm.
Fintechs and telcos have entered the lending market to fill the demand for accessible and appropriate financial products which has been left unfulfilled by the legacy lenders.
The 4 products that these alternative lenders have created and offer to the under-served are referred to as Alternative Payment Methods (APM) and include:
- Instant payments
- Account based transfers
- Digital wallets
- Buy Now Pay Later (BNPL)
These 4 alternative products are fuelling the growth in mobile financial services, which is often also referred to as ‘MoMo’ (mobile money) as the transactions are typically conducted on smartphone handsets.
Terms
Alternative Lenders
“Alternative lending refers to any loan that is secured outside of a traditional banking institution.
There are many types of loans that fall under the umbrella of alternative finance — everything from direct lending and equity financing to debt financing. While the lending options vary, what alternative lending companies share in common is their specialization in business lending and financing options, rather than all the other services of a traditional bank.
Alternative lenders are also more readily accessible than banks, and often offer a streamlined lending process owing to their use of online tools that facilitate the underwriting process.
Moreover, alternative lenders provide greater flexibility surrounding certain loan requirements like credit score and annual revenue. And while alternative loans typically require higher interest rates than their conventional counterparts, alternative lenders are also more responsive to changes in repayment schedules.”
Alternative Credit Data
This has become somewhat of a ‘holy grail’ as lenders seek to extend credit to ‘thin file’ and ‘no file’ applicants. What constitutes alternative credit data and the similarities and differences between this, and traditional credit data is summarised in the table below:
Alternative Payment Methods (APM)
“APMs or Alternative Payment Methods are defined as any form of payment other than cash or major card networks such as Mastercard, Visa, etc. The most popular alternative payment methods are prepaid cards, digital wallets, mobile payments, and BNPL (Buy Now Pay Later) loans.”
Instant Payments
“The growth of e-commerce has caused changes in people’s spending patterns. Shopping is no longer confined to regular business hours, creating new challenges for funds transfers. Similarly, merchants require faster and more reliable money transfer systems to keep up with consumers’ demands.
Traditional electronic payments like simple bank transfers, that perform the electronic funds transfer within few business days, are not in line with user expectations.
Instant payment (sometimes referred to as real-time payment or faster payment) is a method of exchanging money and processing payments, allowing for almost immediate transfer of money between bank accounts, instead of the more typical one to three business days.”
Account Based Transfers
“Account-to-account (A2A) payments, also known as account-based, online banking, or direct account payments, describe direct money transfers from one account to another. In simple terms, account-to-account payments mean the online payment moves directly from a payer’s bank account to a service provider’s or a merchant’s bank account without intermediaries such as debit or credit cards.
A2A payments have been used for a while now. Traditionally, consumers have used direct bank account transfers for payments specific to bank accounts, such as scheduling bill payments via direct debit. Open banking and real-time payments have opened new opportunities for A2A transactions.
Account-based payments are on the rise and are becoming more widely used daily. The benefits of A2A payment rails outweigh the advantages of card networks and have the potential to become a more popular online payment method than traditional card payments.”
Digital Wallets
“A digital wallet, also known as an e-wallet, is an electronic device, online service, or software program that allows one party to make electronic transactions with another party bartering digital currency units for goods and services. This can include purchasing items either online or at the point of sale in a brick and mortar store, using either mobile payment (on a smartphone or other mobile device) or (for online buying only) using a laptop or other personal computer. Money can be deposited in the digital wallet prior to any transactions, or, in other cases, an individual’s bank account can be linked to the digital wallet. Users might also have their driver’s license, health card, loyalty card(s) and other ID documents stored within the wallet. The credentials can be passed to a merchant’s terminal wirelessly via near field communication (NFC).”
Buy Now Pay Later (BNPL)
“Buy now, pay later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them at a future date. BNPL is generally structured like an instalment money lending process that involves consumers, financiers, and merchants. Financiers pay merchants on behalf of the consumers when goods or services are purchased by the latter. These payments are later repaid by the consumers over time in equal instalments. The number of instalments and repayment period varies depending on the BNPL financiers.
In the early 21st century, fintech companies developed systems that allowed instalment plan lending to be integrated into the payment flow of online shops, allowing a consumer to receive instant credit at the point of sale and pay for a purchase later, based on an agreed schedule. The integration and instant processing elements are what sets BNPL apart from other approaches to consumer lending.
BNPL has been described as “similar to a credit card but without the hassles of an application process, card-swiping infrastructure, and separate limits for purchases and cash withdrawals.” Retailers that partner with BNPL financiers can offer customers the option to pay for purchases using BNPL. If a customer opts to complete the purchase using BNPL, the financier will typically carry out a soft credit check on the customer, and return a decision within seconds. The financier pays the merchant if approval is received and offers the customer various repayment options. These may include delaying the payment for a short period of time or spreading the full balance over several smaller payments.”
Mobile Financial Services
“This is defined as the use of a mobile phone to access financial services and execute financial transactions. This includes both transactional and non-transactional services, such as viewing financial information on a user’s mobile phone. Further explanation Mobile financial services include both mobile banking (m-banking) and mobile payments (m-payments).”
Mobile Banking
“The use of a mobile phone to access banking services and execute financial transactions. This covers both transactional and non-transactional services, such as viewing financial information on a bank customer’s mobile phone.
The term ‘mobile banking’ is often used to refer only to customers with bank accounts. Mobile banking is a type of electronic banking, or e-banking, which includes a broad array of electronic banking instruments and channels like the internet, POS terminals, and ATMs.”
Mobile Payments
“An e-payment made with a mobile phone.”
Mobile Money (MoMo)
“A mobile-based transactional service that can be transferred electronically using mobile networks. A mobile money issuer may, depending on local law and the business model, be an MNO or a third party such as a bank. Often used synonymously with ‘mobile financial services.’”
Summary
Whilst it sometimes feels like we are being hit by a torrent of new products, technologies and terms, take solace in the immortal words of George Bernard Shaw:
“Progress is impossible without change, and those who cannot change their minds cannot change anything.”
About the Author
Stephen Leonard is the founder of ADEPT Decisions (www.adeptdecisions.com) and has held a wide range of roles in the banking and risk industry since 1985.
