Alternative lenders like OnDeck, Prosper, and LendingClub have run into some real trouble lately. LendingClub’s situation is the most widely publicized–and the most serious, given that its CEO resigned amid questions about altering millions of dollars’ worth of loan applications. But the troubles in the sector go deeper than issues at one well-known company. Layoffs at Prosper, missed earnings at LendingClub, and performance struggles at OnDeck and other companies all point to a broader problem with the sector as a whole.
Alternative lenders snapped up a lot of institutional investor money at a time when interest rates were unusually low and competition among lenders was fierce. Alternative lenders – also known as digital marketplaces – met a strong untapped need for credit among small businesses and grew rapidly due to the speed and convenience online lending provides. But without the reliable liquidity that traditional banks enjoy, alternative lenders are struggling now that institutional investors are starting to move on.
All of this spells opportunity for banks. Small business borrowers are still looking for quick and convenient online loan approval. The technology that has enabled alternative lenders to approve loans to a wide range of businesses in a matter of days or even hours is now available to banks. Combining alternative lenders’ speedy service with a traditional bank’s high lending standards, reliable liquidity, and mature regulatory model could create a hugely valuable, long-lasting revenue stream. Here are three ways banks can take advantage of the upheaval in the world of marketplace lenders:
- Use new technologies to make small business loan approval faster–and cheaper. These days, traditional banks have access to the same kinds of technological solutions that have enabled alternative lenders to reduce time-consuming manual operations, and thus reduce loan origination costs. This new technology can help banks make their small business loan portfolios more profitable, without cutting any corners when it comes to lending standards.
- Introduce risk-based pricing to expand the pool of creditworthy borrowers at limited additional risk. Risk-based pricing is a win-win for borrowers and lenders. Currently banks extend the same pricing to all accepted loans – it’s a simple binary decision. Alternative lenders charge much higher prices for mostly edge-case loans. Using big data, traditional lenders can close this gap with loan pricing that reflects the borrower’s risk profile. By supplementing traditional credit criteria with additional data like positive Yelp reviews or strong shipping data for pre-ordered products, lenders get a more comprehensive, nuanced picture of borrowers’ creditworthiness, grounding risk decisions on “gray area” borrowers in data, not a hunch. Risk-based loan pricing gives small businesses access to the capital they need from a stable, well-regulated, trustworthy institution at a much more affordable cost compared to digital marketplaces. Meanwhile, banks can reach new small business customers and expand their loan portfolios while safely accounting for potential higher risk of any edge-case loans.
- Offer more favorable terms to highly qualified borrowers, increasing demand and winning over profitable new customers. The new technologies that make it easier to approve (or reject) loan applications more quickly also make it a simple matter to sweeten the deal for highly qualified borrowers. These successful small business owners can become immensely valuable lifetime customers–and technology can help banks significantly lower the cost of acquiring these customers.
The troubles now facing alternative lenders create a huge opportunity for banks to recapture the small business loan market. As the rapid rise of alternative lenders over the past few years has shown, new technologies have made this market increasingly attractive. Traditional banks have both the liquidity and the maturity to enter this market on much more stable footing than the now-struggling newcomers. This is an opportunity banks can’t afford to waste.
Learn more about how banks can effectively compete against marketplace lenders in the free eBook, “How to Create a Smarter, Faster Lending Process.”