The FinTech industry saw an extraordinary explosion in 2015. 2016 should be an interesting year for FICO, student debt and Bitcoin.
The fintech industry saw an extraordinary explosion in 2015. According to the Pitchbook, about $7.6 billion was invested in fintech companies in 2015; a substantial increase as compared to $4.7 billion in 2014 and $1.5 billion in 2013.
These numbers are only expected to grow in 2016. More and more companies are entering the game, and rightfully so.
With the enormous amounts of money that have been invested, and some of the massive revenue reports from fintech startups, the chance to reap the rewards is too good to pass up for many aspiring entrepreneurs.
As we continue through 2016, keep an eye on these three fintech trends that are sure to garner much attention.
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1. FICO Free
Many companies are starting to shy away from using FICO credit scores to judge the eligibility of their customers. More than 90 percent of lenders use this simple number to both determine if a person qualifies to borrow money, and if so, what his or her interest rate will be.
FICO credit scores are highly dependent on if payments are made on time or not. Though this is important, it only takes into account the history of borrowers, not their potential.
In addition, many millennials do not follow the traditional credit-building path that previous generations have for so long. This leaves them automatically marked as ineligible for programs that utilize credit scores even though they may have secure jobs, decent incomes,and no debt.
As companies shift toward big data and better utilizing technology, many are starting to use advanced metrics that account much more information and provide a more accurate view of their customers.
One example is student loan refinancing lender Earnest. This company analyzes thousands of data points to judge a customer, including income, amount of debt, and whether or not the applicant has a secure job.
Earnest succeeds if their customers successfully pay back their debt, so it makes sense that they would want to choose those that are most likely to do so.
2. Student Loan Refinancing
Speaking of student loan refinancing, this is another hot trend to watch in the fintech industry throughout 2016. The outstanding student loan debt has now reached more than $1.3 trillion in the U.S., and continues to grow everyday.
As more loans enter the repayment phase, there are more loans that are potentially eligible to be refinanced to a lower rate and companies are looking to profit.
Investors are also realizing this profitability as well. According to this report, SoFi, the largest student loan refinancing lender, was able to secure an astonishing $1 billion in Series E funding in 2015.
This is believed to be the largest investment in the fintech space of all time.
There have also been many other investments made in student loan refinancing companies aside from SoFi. In 2015, the previously mentioned company, Earnest, was able to raise $275 million and another lender, CommonBond, raised $35 million.
The trend has continued into 2016, as Delaware-based startup, College Ave Student Loans, has just recently landed a $20 million investment to bring its total money raised to $40 million.
Don’t be surprised if more firms invest in companies looking to profit from the incredible amount of outstanding student loan debt this year.
3. Bank Turning to Blockchain
Blockchain may seem confusing at first, but it is easy to understand why it is gaining popularity in the fintech industry. In short, blockchain is a public record of every bitcoin transaction that has ever occurred.
Once enough computers connected to the bitcoin network separately analyze and confirm a block of bitcoin transactions, it is added to the chain that will exist forever and is unable to be changed.
This decentralized computer network is a more accurate and secure form of ownership identification and is much cheaper. Banks who adopt the technology are able to make transactions with each other directly, as opposed to using an intermediary.
R3CEV, a firm focused on implementing blockchain technology, recently completed a five-day test allowing 11 banks to exchange private currency over open-source block chain technology.
The test was successful as all transactions were verified instantaneously and no data was lost.
Currently there are 42 banks in the R3 consortium, and more are expected to join if the results from these small-scale tests continue to succeed. The security, speed, and cost efficiency of this technology make it difficult to ignore.
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Though the fintech industry broke out in an impressive way in 2015, it is expected that it will continue to grow in 2016.
While the diversion away from credit scores, an increased focus on student loan refinancing, and the emergence of blockchain technology are likely to be three of the most common trends, there are sure to be others.
Only time will tell what becomes popular, what fails, and what technology might change our world for the foreseeable future.