Alternative Commercial Lending
Earlier this month, Goldman Sachs Group Inc. Equity Research published a report titled The Future of Finance: The Rise of the New Shadow Bank. The release focused on the emergence of shadow banks, or lending activities that take place outside of the traditional banking realm.
In recent weeks, leading alternative lenders such as Lending Club have been making headlines for their innovative new approaches in rapidly delivering capitol directly to consumers. As such lenders remain a part of the national conversation, and begin to see their market share expand, the Goldman Sachs report set out to determine what impact they will have on the traditional banking system.
Currently, Lending Club and Prosper are solidly entrenched as leaders in unsecured personal lending, and could be poised for significant future growth. Although the report noted that their current combined share is just 2 percent of the $843 billion market, analysts project that number could grow to reach as high as 15 percent by 2025.
The comparative lack of regulation and commitment to technological advancement have given shadow banks the ability to seize grounds from traditional institutions. The Goldman Sachs analysts noted that stricter capital requirements means reduced credit availability in some sectors, and institutional lenders have also been hit with higher credit costs. Combined with the increased scrutiny placed on high-risk lending by regulatory bodies, alternative lenders have capitalized on their ability to offer a more streamlined lending experience.
The use of Big Data analytics and non-traditional data bureaus, along with lending technology similar to traditional lenders and novel distribution channels has also increased the affordability of shadow banking, allowing them to offer loans at lower interest rates than advertised in the traditional space. By targeting markets that have largely been underserved by the traditional banks, namely borrowers with higher credit scores, these new lending firms have been able to cement a foothold in the industry.
The The Future of Finance report specifically identified six areas where traditional banks are vulnerable:
- Consumer lending
- Small business lending
- Leveraged lending
- Mortgage origination and servicing
- Commercial real estate
- Student lending
Lenders need to be aware of the changing climate in their marketplace, and need to leverage the right tools to ensure they remain relevant and competitive in changing times. Credit risk software that streamlines workflow and can draw on alternative data sources to offer a more complete picture of borrower creditworthiness has become increasingly crucial for long-term sustainability.