The traditional channels for borrowing funds, predominantly led by banks and financial institutions, have historically served as the primary credit source for both individuals and businesses. However, the emergence of alternative lending, driven by innovative technologies and evolving consumer preferences, has opened up fresh possibilities for borrowers and investors. In this article, we explore the rapid growth and influence of alternative lending, as well as its transformative impact on credit access and management.
Alternative lending, also known as marketplace lending, encompasses a wide array of financial services, including peer-to-peer (P2P) lending, crowdfunding, online platforms, and fintech-driven lending solutions. It leverages technology and data analytics to bridge the gap between borrowers underserved by traditional lending institutions and loan investors seeking attractive yield-generating investments. Credit risks underwritten by alternative lenders have expanded over time as capabilities to assess creditworthiness improve, offering personalized lending options to a wider market.
Source: Morgan Stanley
One of the key drivers behind the rise of alternative lending is its ability to fill the credit gap left by traditional banks. In the aftermath of the 2008 global financial crisis, banks became more risk-averse and stringent in their lending practices, making it difficult for certain borrowers, such as small businesses and individuals with limited credit history, to access loans. Alternative lending platforms, with their flexible and data-driven approach, seek to streamline the traditional lending process by rapidly underwrite borrower credit risk when determining appropriate loan pricing, terms and amounts offered to borrowers.
The digitalisation and democratisation of finance has accelerated demand where consumers and SMEs expect seamless digital experiences throughout the whole customer journey. Against this backdrop, alternative lending platforms have built user-friendly, online interfaces that streamline the loan application and approval process. Borrowers can now complete the entire lending journey from application to disbursement without leaving their homes, making borrowing more convenient and accessible.
The alternative lending ecosystem boasts a variety of lending models, each catering to unique borrower requirements. P2P lending platforms enable individuals to lend and borrow from one another directly, cutting out the middleman and often offering more competitive interest rates. From an investor’s standpoint, P2P lending, in particular, has attracted a growing number of retail investors seeking better returns than those offered by traditional savings accounts. These investors can now diversify their investment portfolios by lending to a pool of borrowers with varying risk profiles, thereby potentially earning higher yields. The unsecured consumer alternative lending helps diversify away from major asset classes, including traditional corporate credit. The underlying credit exposure often stems from the consumer, rather than from corporate or government credit exposure, usually present in traditional fixed income ideas. Additionally, some alternative lenders specialize in specific niches, and provides multiple axes for further diversification (i.e. loan segments like student loans, payday loans . or micro-financing for developing economies, credit quality, geography, loan duration and balance size).
Traditional lenders have long relied on credit scores and collateral as primary determinants of creditworthiness. Alternative lenders, on the other hand, have embraced a broader range of data points to assess risk. By harnessing big data and machine learning algorithms, these platforms can evaluate factors like social media behavior, transaction history, and even educational background to paint a more comprehensive picture of a borrower's creditworthiness. To underwrite a SME, alternative data like GST turnover, income, industry CAGR% and transactional trends can help with the analysis. This data-driven approach allows alternative lenders to make more informed lending decisions and provide loans to individuals and businesses that may have been overlooked by traditional credit assessment methods.
The rapid rise of alternative lending has been a game-changer in the financial industry. By leveraging technology, data analytics, and innovative lending models, alternative lending platforms are redefining how credit is accessed and managed. With its potential to bridge the credit gap, drive financial inclusion, and offer new investment avenues, alternative lending is set to play an increasingly significant role in reshaping the financial landscape for years to come. However, as the industry continues to evolve, regulators and stakeholders must strike a balance between fostering innovation and ensuring consumer protection to maintain the sector's sustainable growth.
Sources: Morgan Stanley, Experian, Forbes, LSB