Alternative lending is on the rise as traditional banks struggle to lend

By Puja Sharma

Alternative lenders can efficiently onboard customers by using technology based on machine learning and AI. Although traditional banks still hold a larger chunk of the business lending market, growth has slowed, suggesting a growing demand for alternative lending platforms.

Alternative lenders are in a unique position to challenge incumbent banks because they have a massive market share of SMBs, and unless traditional banking institutions modernise their lending practices, alternative lenders could gain even more market share.

In the US, SMBs account for nearly all private sector businesses and employ 60% of all workers, according to Insider Intelligence’s SMB lending report. The problem, however, is that SMBs usually have trouble getting loans at incumbent banks and instead turn to alternative lending platforms.

The entire financial industry is closely watching the alternate lending space and is starting to get involved. As a result of regulation, banks cannot completely transform overnight, so some aspects of alternate lending are being incorporated into their operations. Loan applications are now more streamlined. To provide financial services with the bank’s branding, some banks have partnered with alternative lending firms.

Rise of secondary market

Alternative lending packages, which are small-ticket loans bundled and sold to institutional lenders to mitigate risk, have been the subject of rumblings about a new secondary market, but nothing has been implemented on a massive scale. Until now, anyway.

Several of the big more traditional lenders are starting to show an interest in creating these kinds of nontraditional lending packages and investing in them. In 2022 and beyond, it wouldn’t shock anyone if this market grew rapidly.

Automation and AI will drive alternative lending

Big data, AI, and Machine Learning that forms a bigger part of automation can drive the alternate lending industry this year. Emerging banks are inclined towards innovative technology to analyse risk compared to the traditional companies in the lending space. These companies are becoming a front runner to adopt Big Data, leveraging AI and Machine learning to make more informed decisions faster.

Through this, the goal of the industry is to achieve quality customer service and faster loan payment—including lower risk and smarter loans.

A good investment option

A relatively small number of nontraditional and alternative lenders have the agility and will to adopt new technology, as well as the ability to navigate the new world of business better than the larger, slower-moving, more entrenched traditional lenders. By 2022, legacy and traditional lenders will address this deficiency. The alternative lending sector itself is considered by many to be a very attractive investment opportunities for major companies and big investors.

Partnerships

Banks and traditional lenders that don’t want to buy alternative financing companies outright are still going to want to partner with them. Due to the regulatory environment in which they operate, banks cannot change their business models completely overnight, and yet they want to be able to offer the same kind of solutions and services nontraditional lenders do.

Banks will likely do everything in their power to integrate alternative lending services into their lending menus as much as possible while looking for ways to reinvent and reimagine many of their legacy services within their regulatory framework.

The 2008 financial crisis left a gap that alternative lending is filling. Smaller businesses were hit hard by the recent pandemic. Transparency in the banking sector has been steadily pushed since then. Despite this, bank fraud still occurred. These alternative lenders have greater flexibility now that banks are regulated more strictly. To build trust and keep their pricing transparent, alternative lending firms need to be transparent. By doing so, they can avoid getting bogged down by excessive regulations.