Alternative lenders at the forefront as fintech transforms the way Americans borrow and invest.
Advances in technology continue to change the way individuals and businesses access capital, and alternative lenders have been at the forefront as financial technology innovation transforms the way Americans borrow and invest.
Using slick and mobile responsive websites, alternative lenders connect potential borrowers to accessible online applications and then seamlessly analyze their creditworthiness and risk factors via robust algorithmic technology.
Even traditional lenders are embracing innovative financial technology as businesses realize that this is the direction the world is headed. Who hasn’t heard of Rocket Mortgage — Quicken Loans’ reinvention of the mortgage experience? They offer approval of an online loan application in about eight minutes, roughly the time it takes the space shuttle to reach orbit. Introduced in November 2015, Rocket Mortgage funded more than $5 billion in loan volume in the first three quarters of 2016, making it a Top 30 mortgage lender.
Alternative lenders have re-imagined the entire mortgage market, tapping powerful fintech to find new and better ways to reach borrowers and investors with a variety of products designed specifically to meet their needs.
It’s working. The marketplace for alternative lenders has been on the rise for several years. U.S. online lenders more than tripled their lending volume between 2014 and 2015, from $11.7 billion to more than $36 billion, according to an April 2016 study by the University of Chicago’s Polsky Center for Entrepreneurship and Innovation and the University of Cambridge’s Centre for Alternative Finance.
In 2015, the United States was listed as the world’s second largest online alternative finance market behind Mainland China, according to the report. The United States had the world’s highest total online alternative finance market when viewed as volume per capita.
U.S. marketplace lenders are poised to reach $90 billion in originations by 2020, according to a 2016 U.S. Department of Treasury report about the opportunities and challenges in online marketplace lending.
For alternative lenders in the crowdfunding space, Technavio predicts the global crowdfunding industry will grow at a compounded annual growth rate of nearly 27 percent through 2020.
Fintech, to be sure, has played a significant role in this growth. As more customers migrate to digital channels, fintech has drastically changed the way many businesses operate — from retail giants such as Amazon and Apple to traditional banks.
Speed: A Major Attraction
It’s fairly common for online alternative lenders to provide potential borrowers with a lending decision within days. The quickness of these decisions is made possible by financial technology and has contributed to the strong growth of alternative lenders.
Speed is a key differentiator for alternative lenders as they compete with the nation’s well-known banks and mortgage lenders who may have greater name recognition and bigger footprints but are strapped with old, legacy technology systems that can be a significant expense and time commitment to upgrade.
This rapid approval process has been a core benefit that alternative lenders have promoted to attract customers. Applications are submitted online and there’s no brick-and-mortar retail location or any handling of paper documents.
Algorithmic technology used by alternative lenders enables credit decisions and underwriting to happen in days, not the weeks it may take a more traditional financial institution to act.
While speed is good for the consumer, it also is good for the alternative lending platforms, as it is a core benefit to attract new customers.
Transparency of Platforms
While providing transparency into the risks and rewards of online portfolios is a strength of alternative lenders, not all platforms are created equal.
It’s important that borrowers and investors look into an alternative lender’s transparency and make their own judgment call about whether they have all the information they need to apply for a loan or to make an investment decision. Certainly, investors are encouraged to talk with their financial adviser and legal counsel prior to making an investment on an alternative lending site or before taking out a loan.
Investors who have no real estate or financial background may find it difficult to evaluate the sites for criteria such as speed, transparency, data quality and customer service. How does a potential borrower or investor know whether the site’s algorithms for evaluating financial data of a potential borrower or a potential investment are sound, for example?
There’s been a lot written on alternative lenders in the past three to four years, so some sleuthing via Google is a good place to start but investors, and borrowers should also seek out references, expert advice and, of course, check with regulators regarding compliance.
New investors will need to take some time for these evaluations. They’ll want to read the small print, such as the company’s legal disclosures, to make sure there exists a level of transparency with which they are comfortable. If you are going to be giving an online lender sensitive financial data in the course of a loan application, you’ll want transparency into the way the lender operates and how it protects personal financial data.
If you are applying for a loan — whether from an alternative or traditional lender — you’ll want easy-to-understand information about the loan’s terms, such as the interest rate and fees. Everything should be transparent and understandable.
Great Customer Service
At first blush, it would seem like brick-and-mortar banking institutions might have a leg up on customer service due to the ability to serve customers face to face, but there’s more here than meets the eye.
As many of us know, securing a real estate investment loan – whether for a fix-and-flip, rehab, or a straight purchase – can be painful and time-consuming. Just completing all the documentation for application can take days, while the appraisal and underwriting process can drag on for weeks, potentially yielding a disapproval, creating significant inefficiencies in your investment business.
The 24/7 access to online marketplace lending portals is a big deal in today’s tech-savvy world. Attempting to access a lender during business hours is no longer an issue, as alternative lenders allow a customer to access their site and file an application on any day and at any time that is convenient for them, not just convenient to the lender. The actual process, once a borrower is on an alternative lender’s website, is typically fully web-based without the requirement to gather paper documents.
The availability of online alternative lenders has created more opportunities for borrowers, lenders and investors as geographical boundaries have melted away.
The fact that alternative lenders are expanding credit availability to borrowers who may not qualify for a traditional bank loan is also an important customer-centric focus for marketplace lenders.
Like traditional lenders, alternative lenders are continuing to evaluate their services to the customer in order to attract repeat business. Technology allows for subsequent loans to be processed much faster and more efficiently. This speed can yield a far superior customer experience, increasing the chance of those borrowers returning for their next loan.
Big Data Pushes Alternative Lending to Forefront
Big data has the potential to truly transform lending in the United States, even for traditional lenders, some of whom lag behind in adopting robust financial technology into their platforms.
For decades, a person’s credit score has been the one go-to guide that has played a huge role determining whether a loan would be approved or not. Those with marginal scores were often denied. After the financial crisis, when times were tough and foreclosures were rampant, banks tightened the hatches even more and getting a loan became, well, pretty darn difficult.
Now big data is changing the way lenders consider who is a good risk and who isn’t. While credit scores may not disappear from the lending equation, big data has allowed lenders to supplement credit scores by looking at a much wider variety of information to help them determine if a potential borrower is a good risk. Asset-based lenders providing real estate loans are often more concerned with the ARV/LTV of the project itself, as opposed to solely evaluating the borrower’s transactional history.
Forbes notes that alternative small business lender Kabbage gathers information from Intuit, QuickBooks, eBay, PayPal, Amazon and Authorize.net, along with relevant shipping data, and so on. These are just a few of the potential data sources that help determine a borrower’s risk profile.
Alternative lenders have become such an important component of current financial society in the past handful of years that soon they may no longer be referred to as alternative. Much of what they are doing now to disrupt the status quo will become the status quo. Speed, transparency, exceptional customer service and innovative use of technology will be the given, not the exception.
Fintech will continue to mature as the alternative lending segment ages. Lenders will evolve their smart algorithms to find the balance that allows them to expertly evaluate the risk level of potential borrowers and decide whether it makes sense to extend a loan.
“The growth and development of this market is being influenced by broader technological and societal changes, which suggest a structural rather than a cyclical change to how finance is being provisioned,” said the Cambridge/University of Chicago report.
“We expect the industry will continue to break new ground in innovation, technology, credit risk modeling, user experience and customer service as platforms respond to growing competitive pressures and increasing compliance demands from regulators.” Indeed, the many benefits of fintech as applied to the alternative lending market are just being discovered.
ABOUT THE AUTHOR
Brian Fritton is Patch of Land’s Co-Founder and Chief Technology Officer. He oversees Patch of Land’s technology strategy, including development, infrastructure, information security and mobility across all aspects of the company’s proprietary software. Fritton has more than 10 years of technology leadership and implementation experience across a wide range of development languages, enterprise frameworks, UX/UI, API-centric products, service oriented infrastructure and high-availability architecture. He has led teams in setting strategic product vision and execution in the search industry, online ad exchanges, billing and accounting, media and financial services. Fritton previously held a leading development role with one of the nation’s leading e-commerce solution providers, helping to plan and build applications for brands like Warner Music Group and Ghirardelli and also led the implementation of a large-scale API, billing and audit system for Info.com’s keyword marketing venture. He holds a B.S. degree in E-Business from DePaul University in Chicago.
This contributed article originally found on: Private Lender.