Alternative Lending: Friend Or Foe To Banks?

Recently I had the opportunity to pose a few questions to Glenn Goldman, CEO of alternate small business lender Credibly. They have focused on providing loans to small companies without stable collateral and with limited or no credit history. Interest rates are on the high side, but clearly disclosed, and the application process is designed to be very simple and very quick.

FinTech – Disruption or Partnership

Since lending is the beach-head upon which the “disruption” school of FinTech stands or falls, I thought it would be good to get some perspective from one of the more successful players. So first of all, I thought, let’s see how Glenn views Credibly in relation to traditional and digital banks? Does he see them as a competitor, a complement, or a partner? (Or maybe even all three?) His response may surprise you:

“We certainly aim to be a complement and partner to traditional lenders. Credibly has relied on banks for both referrals and best practices from the very beginning, and it simply wouldn’t be possible to do what we do without those relationships.

“Through our data technology, Credibly can lend to customers many banks would pass over, despite solid business fundamentals. We can underwrite loans under $500,000 more cost-effectively than banks can, and we offer advantages in speed and user experience.

“As part of our approach to partnering with banks and others we have designed our data science, risk management and technology to be compliant extensions of our partners existing capabilities, not a replacement.

“The combined strengths of innovative lenders and traditional lenders have created a complementary ecosystem in which the financing needs of small businesses can be met across the credit spectrum, and many banks are beginning to partner with innovative lenders to provide the most possible capital to American entrepreneurs who will use it to create jobs. That's ultimately the goal of the small business lending industry.”

Getting the Word Out

One of the key things I’ve learned about financial management needs, for rich or poor, for large companies or small, is that the range of needs exceeds the range of options available for traditional banks. One of the great values of the alternative lending segment is that it is starting to fill in some of the gaps. A key question remains though – how does the word get out beyond early adopters that these new options are available. Says Glenn on this challenge:

“I’m most surprised that many small businesses owners don’t realize that capital is available to them through online lenders. That’s why Credibly has many initiatives that aim to educate entrepreneurs on the financing options online lenders can provide.

“We routinely post educational content on the InCredibly blog, and offer a quarterly publication devoted to alternative financing called the Credibly Business Journal. We also host webinars that teach entrepreneurs how to best use capital and take their business to the next level.”

Regulatory Impact on FinTech

That regulation is excessive is one area on which all FinTech players (other than RegTech) agree. Most will say that some regulation is needed, and that consumers and business need to be protected against misleading and predatory lending practices. Says Glenn:

“I certainly support reasonable regulation of the lending space, regulation that will remove any doubts about the efficacy and reliability of the business model.

“However, poorly-drafted or implemented regulation can stifle any industry, and it's doubly important that regulation doesn't restrict lending, as it fuels our small business economy.”

Growing Pains

A big challenge for many successful FinTech companies has been the need to change their culture to reflect communication challenges, sustainability of revenue growth, etc. For Credibly this hasn’t so far been a big challenges, except in terms of being able to scale their product set.

“The biggest change I've noted in my time is that as we grow, we've begun to partner with larger, more traditional lenders, such as SunTrust Bank, which only serves to validate Credibly’s position as one of the most trusted and secure names in the innovative lending industry. It allows us to continue offering a wide range of affordable financial products to businesses across the credit spectrum.

“Despite the rapid scaling of our business, the best parts of Credibly haven't changed. We still have an incredibly robust data model that can determine whether an entrepreneur is worthy of capital more efficiently than banks, and we have what we believe to be the best customer experience in the industry.”

Economic Threats

In alternative lending in particular, there is a lot of recent doomsday press around the future of even the biggest lenders, such as Lending Club and OnDeck. But already we are starting to see signs of recovery, albeit with adjustments to the business model. As Glenn says:

“What the industry is experiencing right now is a liquidity crunch. For various reasons, a lot of capital has left the space, and we need to make sure that lenders and investors feel inspired in getting what they need. The good news is that we’re still in somewhat of a benign credit environment, and we know we’re delivering an excellent user experience.

“So whether it's a result of over-lending or a change in the overall economy, we have the opportunity here as an industry to right the ship, diversify funding sources, share data in an even more transparent way, and continue creating the great industry that we now have in front of us.”

Conclusions

What are my biggest takeaways from my conversation with Glenn?

1. Alternative lending is a great example of how FinTech is filling in gaps – addressing areas of finance that the banks don’t find profitable or risk-acceptable.
2. Alternative lending, along with other financial segments, is not something that can be done in isolation from the rest of financial services. We are seeing the development of an ecosystem that includes banks, direct banking partners, infrastructure providers, investors, standalone providers, and so on. As they work together – frenemies or coopetition – we will all benefit.
3. New players will learn as they go, and they will need to be able to adapt, sometimes painfully, to new discoveries or changes in their industry. The survivors will be those that are most adaptable to change. This is a struggle for traditional banks, and an opportunity for FinTech. But growth and scale will start to make this hard for FinTech as well. They must maintain an ongoing view of risk in the industry, so that at least sometimes they can adapt in advance of a crisis.

Graham Seel, a 30 year banking veteran, runs BankTech Consulting. He is an expert in commercial banking, and provides strategic insight and internal business cases to banks. He works as a fractional Customer Success Executive to Fintech firms, facilitating their partnership with banks.