The Rise of Alternative Lenders: How they create Challenges and Opportunities for Traditional Banks

Trevor Mast
Senior Vice President Financial Services Products
Posted on October 29, 2015

alternative lenders

In recent years, alternative creditors have dramatically transformed personal and business lending options. With conventional financial institutions often unable to offer financing in a timely manner or to provide suitable loans for small businesses, online lenders responded by introducing rapid application processes and new, faster ways to evaluate creditworthiness. Although they often charge comparatively high rates, these alternatives supply affordable credit to people who might otherwise have turned to payday lenders.

Major Alternative Lenders
Almost anyone can find an appropriate online financing solution. CommonBond and SoFi provide low-interest student loans; Square combines merchant cash advances with its payment processing service; Kabbage, Funding Circle and CAN Capital also serve business owners; Fundbox helps companies with temporary cash flow problems, and Lendio acts as a broker for alternative commercial lenders. Meanwhile, Prosper and LendingClub let people transform their credit card debt into loans with comparatively low rates.

Swift Growth Persists
Alternative creditors supplied people and businesses with around $12 billion in 2014 – up an astounding 1,200% from just four years before.  Still, only about 11 out of every 1,000 unsecured personal loans currently involve peer-to-peer financing. Small business borrowers, meanwhile, make up 2-3%. While these numbers remain unimpressive, financial analysts predict that this industry will double its lending within two years. It may experience further growth as more young people start businesses; after all, most commercial online borrowers remain younger than 35 years old, according to CNN.

Government Regulation
Online lenders, investors and borrowers worry about the potential effects of future legal restrictions. Although it would make borrowing safer, regulation could also raise expenses and increase waiting times. The United Kingdom and other countries have already begun to regulate these loans, so it’s quite feasible that the U.S. will follow suit. Some officials in Washington support alternative lending because it gives small businesses much greater access to funding. Nevertheless, Federal Reserve Gov. Lael Brainard recently warned that regulation may become necessary to prevent deception and discrimination.

How Should Banks React?
While speaking about regulation, Brainard also highlighted the threat alternative lenders pose to banks. She explained that these firms could become powerful competitors as they continue to rapidly grow.

However, financial institutions don’t necessarily need to treat these businesses as enemies. In fact, cooperation could be mutually beneficial. For example, a local credit union might earn referral fees in exchange for sending disqualified applicants to suitable online lenders. Banks could forgo application processing tasks by purchasing loans from these firms.

Some institutions, like Metro Bank and BBVA Compass, have already partnered with well-known alternative lending companies. In recent news, ING, ScotiaBank and Santander have invested $135 million in Kabbage. Such solutions have the potential to help both industries prosper and continue serving the public in different ways.

What are your plans to face the rise of alternative lenders?  Will they be friend or foe?

Leave a Reply

Trevor Mast
Senior Vice President Financial Services Products

Trevor’s expertise in product management, sales and client service; as well as team leadership; sets him apart from his peers and allows him to provide executive-level guidance to his teams and with his colleagues. At FIS, Trevor provides executive oversight of the credit, debit, ATM, software, and fraud prevention product portfolio.