Alternative lending swooped in to fulfill the needs of consumers and small business owners during the credit pinch after 2008, and every sign points to the industry scaling up. By 2020, some estimate that 1 in 5 small business loans will be made by an alternative lender. That share of the pie will be $52 billion, compared to $5 billion today.
Not too bad.
But what’s going to get us there? What developments will push fintech forward, so these tech-friendly companies can loan more money to more businesses and provide a viable alternative to traditional business financing?
Here are 4 trends to look out for that will help online business lending flourish.
1. Multi-product offerings.
Our nation’s largest financial institutions are full-service banks, offering credit cards, personal loans, student loans, mortgages and small business loans, among other financial products. But to date, most online lenders have stuck to one side of the market, with some notable exceptions like Lending Club, which operates both in the personal loan and small business loan sectors. Over the next few years, we’ll probably see more online lenders offering multiple kinds of loans themselves. Why?
To get a bigger slice of the lending pie and to keep holding onto their customers by cross-selling. The more a single lender can satisfy all the financing needs of their borrowers, the better they’ll do.
For example, peer-to-peer lender Funding Circle offers 1 to 5-year term loans to small business owners. But in the UK, they’ve expanded to 6-month loans as well.
2. Bank partnerships.
Banks have large customer bases, low cost of capital, and scale on their side. Alternative lenders have speed, better user experiences, and a regulatory vacuum to operate in.
While they’re natural competitors, they don’t have to be. Indeed, a number of partnerships are beginning to form between banks and online lenders that will define how the credit needs of small businesses are met in the future.
For example, take a look at OnDeck and JP Morgan Chase’s partnership, which leverages OnDeck’s technology and JP Morgan’s bank deposit data on its small business customers to offer automated underwriting to the bank’s small business borrowers. Or the partnership between Regions Bank and Fundation, in which Fundation is building a fully digital application for Regions Bank customers.
There’s more that unites banks and online lenders than divides them, and we expect to see more partnerships of this nature forming in the coming years.
3. Pushes towards self-policing.
When alternative lenders began popping up, it was a free-for-all: each company played by its own rules.
But over the past few years, we’ve seen the rise of different self-policing initiatives, from trade associations to industry announcements. The Innovative Lenders Platform Association, the Marketplace Lenders Association, the Responsible Business Lending Coalition, the Small Business Borrower Bill of Rights: they’re all attempts at self-regulation. As the online lending industry continues to mature, we can expect to see more efforts toward self-regulation among the industry’s leading players as they endeavor to put the rights that borrowers deserve to have, and the responsibilities that any lender or broker has to respect those rights, front and center.
4. Increased government regulation.
Fintech is one of the hottest topics of discussion in D.C., and it’s easy to see why. Silicon Valley startups disrupting the taxi or mattress industry is one thing, but banking and finance occupies an especially sensitive role in our economy. That’s why the Office of the Comptroller of the Currency, the Federal Trade Commission, and the Treasury Department have all released studies on alternative lending this past year.
Regulators aren’t blind to the potential that alternative lenders have to innovate—and to the possibility that misregulation could quickly lead to the death of an important new industry. But, online lending is brand new, and it’s disrupting what’s traditionally been a highly regulated industry. So, expect more news coming out of Washington as regulators look to get up to speed on the innovation that’s happening in online lending, and seek to build first principles on what an appropriate regulatory framework should look like.
It’s hard to say for certain what online business lending will look like, but we can be pretty sure that it’s here to stay. These 4 developments will each play a big part in transforming fintech from a trendy disruption into a long-standing industry.
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