The alternative lending space has journeyed through growth and struggled with challenges, especially in the last year. That goes for all segments of the space: SME, consumer, student, auto and mortgages. With all of the chatter surrounding the future of alternative business finance, analysts at EY have released a new report exploring the path these various AltFin players are on and examining where alternative SME lending fits on that spectrum.
Rohit Kumar, senior manager in the wealth management practice at EY’s Financial Services Organization, and Rashmi Singh, senior manager in the wealth management practice at EY’s Financial Services Organization, hashed out the state of alternative SME lending for PYMNTS as alternative finance creates new dynamics of competition, regulation and technology.
“Based on our extensive conversations with industry professionals, and our own research, we feel this industry has very high growth potential,” Kumar stated. “And we’re literally at the tip of the iceberg, as we speak.”
That iceberg is the potential market share that alternative SME lenders stand to grab, if they play their cards right (and if market conditions support that expansion). According to EY’s report on alternative lending, released this month, the SME alternative finance space is relatively small today, compared to other segments.
The alternative SME finance space is the second-smallest of all categories, surpassing only alternative auto loans. Industry players have the opportunity to grab a slice of a sector worth about $284 billion today — alternative lenders hold just $7.3 billion of that share, the report found.
That’s significant yet still far smaller than the alternative consumer lending space — worth about $450 billion, with alternative lenders currently holding just $15.4 billion of that market (the mortgage space is far larger still, with alternative lenders in this area having the largest growth potential, EY concluded).
Still, Kumar and Singh said, that potential to secure more of the $284 billion market shouldn’t be overlooked.
“There are a lot of borrowers who are not in the consideration set by the large banks, because they don’t meet the criteria,” Singh said of small and medium-sized enterprises. She echoed sentiment often heard from alternative lenders that say they aspire to fill the SME lending gap left by banks that consider small businesses too risky. Alternative SME finance companies, Singh added, can give those SME borrowers what they need.
There are obstacles ahead, of course, for the entire alternative finance space, as well as SME lending in particular. While alternative SME lenders have noted that they are less concerned about regulation — some noting that regulators are likely to go after consumer lending players first — the EY executives said this industry shouldn’t ignore potential regulation.
“I wouldn’t 100 percent agree with the sentiment that [alternative lenders] shouldn’t be concerned,” Kumar said. “I think this area will also come under regulation.”
Singh added that there is a sort of “pecking order,” and both agreed that consumer lenders are probably first in that order for regulators. But, Singh warned, even if authorities target consumer lenders first, SME lenders aren’t entirely immune, with many small business loans falling under the category of consumer loan obtained by a single business owner (Singh also said that this type of crossover between SME and consumer lending may also explain why the consumer lending space is so much — some of those consumer loans are going to small businesses).
And there are other issues ahead for alternative SME lenders. For instance, while many players emerged as competitors to banks that could not fill the SME finance gap, today, collaboration between banks and alternative lenders has been key to ensuring these alternative players get visibility and a reputable name behind them.
“One reason [alt-lenders] are growing by leaps and bounds is that big banks are taking notice, and they are partnering with them,” Singh explained. “This is an area where the banks — and this is self-professed — know they need to do better in terms of the seamless digital experience.”
“Everything from loan application to the underwriting, the funding, the servicing,” she continued. “Because [alt-lenders] are relatively new, they don’t have these legacy systems. They’re able to innovate and change on the fly. It’s a huge advantage.”
Kumar pointed to another issue that has been troubling the alternative finance space recently: liquidity.
CAN Capital, for instance, recently put its CEO, Daniel DeMeo, on leave, placing Chief Legal Officer Parris Sanz as interim CEO. Reports said last November that the issues can be traced back to CAN Capital’s business model that led to issues of not collecting the money it was due every day. Lending Club has faced similar struggles, with changes at upper management and allegations of improper underwriting and investment practices. Meanwhile, alternative consumer lending platform CircleBack Lending halted its lending operations last October,
But Kumar said he’s confident these challenges, at least the ones related to liquidity, will sort themselves out.
“In 2016, there were a lot of liquidity issues with some alt-lenders,” he said. “The investment channels these platforms have opened up are making these loans get packaged and available to retail investors, which, I think, is a dramatic shift from what has historically been the case. We believe that, over time, as the market continues to improve, the liquidity situation that these lenders have been facing will also dramatically improve.”