First, let’s define what alternative lending means. It’s a broad term that describes a wide range of loan options to consumers and business owners outside of a traditional bank or credit union loan. These alternative lenders are most commonly used when an individual or business owner cannot obtain a traditional loan from their FI for any number of reasons. Another reason is because of the delays and difficulty associated with applying for and being approved for traditional banking loans compared to the speed and ease of use being provided by many of the new alternative lenders today.
An example of the aggressive growth in alternative lending is represented in the chart below. This demonstrates the short timeframe required for a well-funded alternative lender, PayPal, to generate significant market share. PayPal has now become the leading online small business lender in the category. Another interesting fact is that Amazon has revealed that it has had made more than $3 billion in small business loans since 2011 to help small and medium-size businesses selling on Amazon.
“It took PayPal 23 months to get to the first $1 billion in lending,” said Darrell Esch, Vice President of global credit at PayPal. “Demand has never been in shortage.” According to research from deBanked, it took PayPal only five years to reach the $10 billion milestone.
The loan originations were spread out across 225,000 small businesses globally according to PayPal, including the U.S., UK, Australia, and Germany as well as Mexico through a partnership with another online lending platform. Currently, however, PayPal is originating $1 billion per quarter… making this digital player a very formidable competitor.
*Source: “Alternative Lenders Continue to Steal Business From Banks” by Jim Marous, The Financial Brand “
Alternative lending networks exist that will work with financial institutions to guarantee the customer relationship by offering loans to those who may not qualify for a loan at your institution today, but may in the future. It is vital for financial institutions to have a relationship with trusted loan networks to protect this relationship, thus allowing the customer to return to their institution of choice when they once again qualify.
FIs that do not embrace change in how loans are applied for, evaluated, processed and managed will lose out to the many alternative and fintech lenders that are targeting your client base and new prospects. Alternative lending represents an opportunity for financial institutions to expand new and existing relationships while “protecting their turf”. This requires strategic partnerships between alternative lending networks and financial institutions to meet the unique challenges borrowers face, while also guarding the unique connection between FI and client.
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