The rise in alternative lending is a response to tighter bank lending controls, and alternative finance is viewed by many as a direct threat to traditional banking. New research goes deeper into the issue, however, and finds exactly which loan products at banks are most threatened by the rise in alternative lending.
Banks Are Worried
It may come as no surprise that banks are a bit uncomfortable with the emergence and popularity of alternative lenders.
Financial software firm Misys surveyed traditional banks across the U.S., EMEA and Asia Pacific regions regarding their sentiment of the alt-finance space, and found that 75 percent of banks fear a loss of market share to these new, nontraditional competitors. Even more – 84 percent – said they are concerned about rising pressure to competitively price their loan products.
“The threat from non-banks on traditional banking models is clear and present and this has grown largely from the technological innovation in this space,” said Trade Financing Matters editor David Gustin in response to the research, according to Bobs Guide reports. “The challenge is lenders don’t know what they don’t know, meaning many clients will access alternative forms of finance without their knowledge.”
Their Worries Are Targeted
Exactly how alternative lenders are making banks anxious is less obvious. The majority of banks said that small business lending and supply chain finance are the two lending areas that are most threatened by alternative lenders.
According to the research, 68 percent of those surveyed said their SME lending operations, and 61 percent said their supply chain finance products like AR financing and factoring, are facing the most pressure from non-bank competitors.
With small businesses viewed as a high-risk lending segment for many traditional lenders, alternative lenders flooded the market to fill that gap. In a report published by the OECD last April, analysts found that traditional lenders still have not regained their strength in the SME lending segment.
“Access to finance to SMEs continues to be constrained by lackluster macro-economic performance and continued bank deleveraging,” the report concluded. Analysts connected small businesses’ rising need for asset-based financing, unmet by traditional banks, to a rise in alternative lending.
“As firms obtain funding based on the value of specific assets, including accounts receivables…rather than on their own credit standing, asset-based finance can serve the needs of young and small firms that have difficulties in accessing traditional lending, because they are informationally opaque, lack credit history or face temporarily shortfalls or losses,” the OECD found.
According to Misys’ research, this small business shift toward alternative forms of supply chain finance is not going unnoticed.
They’re Willing To Cooperate
Analysts at Misys also found, however, that banks are not simply standing idly while worrying about these changes. The firm’s research report found evidence that traditional banks are willing to collaborate with – not always work against – their alternative lending competitors.
More than two-thirds of respondents (68 percent) said they see an opportunity in forging strategic partnerships with alternative lenders as a way to strengthen their own supply chain finance operations.
“The banking sector understands that it must now react to remain at the center of corporate credit requirements,” said Misys Head of Trade Finance David Hennah, adding that the adoption of innovative technology through FinTech partnerships will also be key to regaining market share in the SME and trade finance lending segments. “Clients want to build trade and lending platforms that help overcome their technical debt in digitally enabled corporate banking and build a foundation to dictate future innovation.”
According to the OECD, even with the rise in alternative lending, non-bank loans “cannot compensate for a retrenchment of bank lending.” Even so, traditional banks are feeling the heat from their new competitors, especially in small business lending and trade finance.
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Despite the anxieties, Misys’ research hints that traditional banks are willing to step out of the box to remain competitive. “Innovation is outpacing the limitations of legacy bank frameworks,” Hennah said. “By thinking differently and embracing change, banks, in partnership with their vendors, can define new value propositions along clients’ financial supply chains.”