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By Jessica Fischer · April 24, 2023
6 minute read

How Alternative Lending is Disrupting Incumbent Institutions

Wind turbines signifying alternative lending solutions

The financial services industry today looks drastically different than it did even just a few years ago. One of the main drivers of that change is technology-empowered alternative lending. With the emergence of new fintech and fintech companies comes the disruption of incumbent banks and their traditional lending practices. Outdated systems and processes can’t keep up as alternative lending providers offer faster, more accessible, and better-personalized services. It’s also one of the reasons many small and medium-sized enterprises (SMEs) are attracted to alternative lending solutions and their fintech providers.  

Technology-empowered alternative lending and the tangible disruption of incumbent institutions was a popular topic at Fintech Talents’ recent event: FTT Lending 3.0. During one of our favorite sessions, panelists from across the financial services industry sat down to discuss the future of lending and what it’ll mean for both banks and fintech companies. The panelists were Andrei Gaman from FintechOS, Ann Juliano from Muse Finance, Conrad Ford from Allica Bank, and John Oliver from Barclays Bank, moderated by Brendan Gilmore from BPG Strategy.  

Here’s a deep dive into technology-empowered alternative lending and a few takeaways from the panelists’ conversation.

What Is Technology-Empowered Alternative Lending? 

Technology-empowered alternative lending refers to the use of advanced technologies, such as artificial intelligence (AI), machine learning, and blockchain, to enhance and streamline the traditional lending process. Using these technologies, alternative lending providers can gather and analyze data on borrowers, automate lending processes, facilitate transactions, and more.  

This helps improve the speed and efficiency of the overall lending process. For example, technology-empowered alternative lending platforms may use AI to assess credit risk and determine loan terms, rather than relying solely on a credit score.  

SME’s Attraction to Alternative Lending Solutions 

The biggest alternative lending player, fintech companies, have been able to use technology-empowered alternative lending solutions to fill a large gap in the market – targeting populations considered non-profitable by incumbent banks. One of these populations is SMEs. They are becoming an incredibly important part of today’s economy and are searching for financial institutions they can form a personal relationship with.  

But SMEs don’t bring long credit histories or significant assets to the table like their larger counterparts do. For SMEs who need funds quickly to purchase inventory, pay salaries, or invest in new equipment, the long turnaround time required by traditional banks to process loans can be a huge turnoff. Speed and flexibility are critical for SMEs in rapidly changing industries where investment decisions need to be made quickly. Due to these challenges, only about 15% of SMEs are happy about the way they do banking with their existing banks, according to Gaman.  

That’s Where Fintech Companies Come In 

Not only can alternative lending providers like fintech companies offer faster turnaround times without needing collateral, they can also provide more personalized terms with lower interest rates and flexible repayment options. Additionally, alternative lending platforms offer a larger range of financing options tailored specifically to that SME. This can be a huge relief for businesses in unique financial situations such as those that experience seasonal fluctuations in revenue.   

According to Gaman, when it comes to developing customer journeys for SMEs, there should be a large focus on the following:  

  1. Automation – SMEs want a fast time to yes (in this case, money), in the simplest format possible.
  2. Relationships – the personal relationship many larger businesses get with their financial providers is attractive to SMEs too.
  3. Omnichannel experience – being able to service the customer at every step of the journey in the same way is now something customers across industries expect.
  4. Data integration – combine internal bank data with external fintech data to personalize these segments.
  5. Speed – smaller businesses need money to grow and innovate their company quickly as they continually test and make changes to their products in the market.
  6. Personalization – SMEs’ needs are unique and should be treated as such. Don’t throw their underwriting needs in with those meant for individuals or large businesses. 

Ford calls Allica Bank’s innovation strategy “high tech, high touch” when it comes to building relationships with their customers, including SMEs. As a fintech challenger bank, they want to give customers the same personal relationship they used to have at traditional banks and have invested a lot in technology to support this. So, what’s stopping incumbent banks from investing in the same technology?  

Incumbent Banks Cannot Keep Up 

Embedding innovative technology is a huge task for incumbent banks dealing with outdated legacy technologies. One that comes with extensive risks and an even bigger price tag. While it may be harder for incumbent banks and their off-the-shelf solutions to pivot, they do realize the sense of urgency to modernize during today’s economic downfall.

After investing millions of dollars trying to build innovative technology themselves, many banks like Barclays Bank have realized it’s more effective to use a fintech provider to deliver better solutions to their customers. By combining data and resources from both parties, banks and fintech organizations can find new ways to look at risk and underwrite said risk.  

The Future of Lending 

Technology-empowered alternative lending has immense potential, such as improving access to loans for underserved populations and reducing costs and time for financial institutions. However, these technologies are still fairly new and are continuing to evolve, leaving room for financial experts such as our panelists to debate their security capabilities and effectiveness.  

The future of lending is bright for alternative lending providers, with many opportunities to continue disrupting incumbent banks in the future, but also many opportunities for banks and fintech companies to work together. The winners in the alternative lending space going forward will be those that are looking at risk differently. This could be anyone – from large traditional banks or fintech companies to a new segment-focused bank or large tech company like Amazon, already familiar with leveraging customer data.  

Want to learn more about how FintechOS can help with your modernization efforts? Click here to schedule a demo of our fintech enablement platform. 

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