Alternative Lending and Credit Unions – Adapting In a Changing Market


Alternative Credit Lenders


Alternative lenders began rising as traditional financial services firms faced risk and regulatory environments that made it extremely difficult for them to offer small loans to consumers and businesses. As these loans became more difficult to obtain from many banks and credit unions, alternative lending organizations emerged to fill the gap. Using digital technologies to gather data pertaining to risk and accelerate decision-making, these lenders have been able to gain market share in a hurry.

The rise of alternative lending for small businesses
A study from Deloitte found that the global private credit market rose to $440 billion in 2015 and hit $560 billion in 2016. Alternative lending is growing especially quickly in Europe, but the global increase is difficult to ignore. This isn’t an isolated trend in private credit either, as many small businesses are looking to alternative lenders as they work to get the funds they need to sustain operations. Research from Javelin found that 7 percent of small businesses are using alternative lending to support their credit needs. Furthermore, 16 percent of small organizations that planned to look for new sources of credit in 2016 will turn to alternative lenders.

Jacob Jegher, senior vice president of banking and head of strategy at Javelin, explained that the alternative lending market is rising as it fills holes left within traditional financial services models.

“Whether you’re bullish or bearish on alternative lending as it stands today, there is one piece of the puzzle that bankers cannot afford to ignore: Alternative lenders have revealed and exploited real opportunities not served by banks,” said Jegher.

“Digital innovation has been serving as a great democratizer in financial services.”

Alternative Lending Market
Credit union loans have long come in fairly traditional forms, but credit unions have an opportunity to get involved in the alternative lending game. In many cases, these emerging lenders are getting ahead because they take advantage of modern technologies to evaluate risk quickly and in cost-effective ways. Analytics solutions that bring together diverse data sets to give decision-makers critical information from the most effective sources allow those lenders to make risk-related choices quickly. As a result, the efficiency behind the lending model – fewer human resources, less organizational overhead and more intelligent decisions – allows lenders to monetize the smaller loans that many consumers and businesses need.

Credit unions have two options if they are thinking about getting into the growing alternative lending market:

  1. Partner with an alternative lending specialist. Many web-based alternative lenders offer rapid loan services, but are looking for opportunities to partner with traditional financial services firms to increase their potential capital on hand.
  2. Deploy analytics software in-house and develop alternative lending products. With digital technologies playing such a critical role in the alternative lending market, there is little stopping credit unions from taking advantage of the same competitive edge by deploying software themselves to allow for accelerated risk management for alternative loans.

Digital innovation has been serving as a great democratizer across a variety of industries. Making data more accessible and actionable is allowing businesses to compete in new marketplaces, and alternative lenders have been disrupting financial services. Credit unions can get on this wave of progress themselves by using analytics solutions to apply alternative lending models within their own loan portfolios.

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