Lendtech, better known as ‘alternative lending’, has opened up significant access to funding for individuals and SMEs.
Bank lending for SMEs, in particular, shrank significantly post-recession as institutions sought to reduce risk. Alternative lenders stepped into the breach, using smart technology to provide a faster, simpler service to consumers and businesses seeking finance.
While in some situations it can take a month or more to have a small business loan approved by a bank, an SME can now secure funds from an alternative lender in less than 24 hours.
The key difference lies in the ability of alternative lenders to base lending decisions on the analysis of wider data sets – including financial and industry performance alongside market and sentiment data, pertinent news and external risk factors – than a traditional credit score.
The ability of alternative lenders to understand and predict repayment behavior in more detail means they can not only reduce the risk of defaults, but also potentially target a much wider customer base, which had been previously underserved by traditional banks.
Smarter customer experiences
As a result, alternative lenders are generally seen to operate according to successful and economically valuable business models – and attract impressive levels of investment.
In June 2019, for example, digital loans company Blend raised $130 million in funding led by Temasek and General Atlantic, while SoftBank confirmed a $200m investment in Brazilian lender Creditas.
Part of the appeal for investors is the significant opportunity for alternative lenders to partner with traditional banks and to help them offer a better customer experience without having to rebuild their own systems.
Strengthening business lending
One recent example is New Jersey-based Provident Bank, which announced earlier this year that it would partner with alternative small business lending company Fundation to strengthen its small business lending position.
Josephine Moran, Executive Vice President, Director of Retail Banking at Provident commented: “This will enable us to effectively serve the growing small business market by providing the capital many small businesses need to grow and reach their full potential. In turn, this will assist these businesses to flourish and create new jobs in our communities.”
No-one can be in any doubt that alternative lenders will continue to prosper, whether that involves seeking investment in their own right or partnering with other financial institutions.
Turning to trusted Fintechs
However, to continue to stand out in the market, alternative lenders will increasingly need to provide extra services beyond basic lending. Just being able to lend funds quickly and easily will not be enough, so we can expect to see alternative lenders moving towards more diversified propositions.
For example, they may offer personalized credit card products, rolling lines of credit, financial education and advice on how to repay loans more quickly. Another approach will be to offer services from trusted third parties, such as Currencycloud’s FX and cross-border payments, creating a single hub that customers can use to manage all aspects of their finances.
The service provided by alternative lenders will continue to improve: customers may come for the loan, but many will stay for the superior experience they enjoy.
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