The notion that traditional lending is dying — that banks are out and alternative lenders are in — is one of the great myth-busting opportunities in financial services today.
More and more, the two sides are working in tandem to serve the capital needs of small business owners, driven by their own particular strengths and the foundational belief that all small businesses have the right to access capital, though not necessarily all on the same terms.
it’s a myth to think of alternative lenders as rivals to banks, when they’re actively developing new ways to work together, and generally serving customers with different needs
Strengths and weaknesses
Banks have alternative lenders beat in three key departments:
First, their cost of capital is significantly lower, which is a big advantage for the customers who are eligible for their products.
Second, traditional lenders and banks have a much lower cost of acquisition, since they already have a sizable installed customer base of small businesses that they serve through bank accounts, checking accounts, and small business credit cards.
The third advantage for banks is the perception of trust: there’s a bank on every corner, they advertise through multiple channels, and there’s a level of awareness and familiarity that makes them a safe choice in the eyes of small business owners. Meanwhile, most alternative lenders interact with their borrowers either online, over the phone, or some combination of the two. From a trust-building perspective, it’s just not the same experience as walking up the marble steps to chat with your banker behind his mahogany desk.
However, alternative lenders have banks beat on speed, the ability to quickly and accurately assess the risk of a small business, and user experience — making sure that borrowing is pleasant, simple, intuitive, and frictionless. Plus, they can underwrite loans under $500,000 more cost-effectively than banks can. As a result, alternative lenders offer a more nimble product set, providing customers with access to right-sized funding when they need it.
A complementary ecosystem
The combined strengths of traditional lenders and alternative lenders have created a complementary ecosystem in which the financing needs of small businesses can be met across the credit spectrum. Fortunately, the enlightened traditional lenders and alternative lenders realize this, and are working diligently to develop partnerships that benefit their respective business models and the small businesses they serve.
Two or three years ago, the majority of traditional lenders had their heads in the sand regarding the disruptive elements of alternative lending and fintech. That category is shrinking, and now there’s a much wider range in terms of how our industry is being embraced. More banks have entered the curiosity stage: “We’ve got to find out what’s going on in the alternative lending space and understand the tools they use for evaluating credit risk and creating positive user experience, because it might threaten our business model.” It’s a combination of an offensive and defensive posture.
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There’s another group of banks that already lend directly to alternative providers, and indirectly provide access to capital for the majority of the market that gets turned down by their own small business lending division. These banks are using their relationships with alternative lenders to learn more and more about the marketplace, and how our technology and risk architecture drives value.
Finally, there are banks that have partnered with alternative lenders and act as their origination arm. What banks like WebBank, Cross River Bank, and Bank of Internet USA do, by definition, is pass their alternative lending partners through the compliance and regulatory regime that they’re subject to, strengthening the overall lending system.
the two sides are working in tandem to serve the capital needs of small business owners, driven by the foundational belief that all small businesses have the right to access capital
In turn, fintech companies are openly sharing the insights they gain around assessing risk, underwriting risk, and how they evaluate borrowers before and after they lend to them. That provides not only absolute transparency, but also the opportunity for partners to improve how they manage risk, which is ultimately the goal here: how do they get more credit to more small businesses?
So, it’s a myth to think of alternative lenders as rivals to banks, when they’re actively developing new ways to work together, and generally serving customers with different needs. The fact is, there are things that banks and traditional lenders do incredibly well — better than alternative lenders ever will — and there are things that alternative lenders do that traditional lenders will likely never be able to do on their own.
As alternative lenders continue to develop partnerships and joint ventures with banks, both parties will work to ensure that there are clear lines between bank-eligible customers who can borrow directly from the bank, and others who are better served by the product set of alternative lenders. This will prevent potential friction, and keep the relationship between traditional lenders and alternative lenders friendly, collaborative, and entirely focused on serving small business borrowers as effectively as possible.
Glenn Goldman is the CEO of Credibly, driving the company’s vision of offering a comprehensive suite of financing products to a broad range of small businesses. Formerly the CEO of CAN Capital for 12 years, Glenn helped create the alternative lending market, building and growing a leading financial technology platform that revolutionized the availability of capital to small businesses.