Alternative lending is changing the face of the financial services sector. By bringing more consumers into contact with funding opportunities, alternative lenders are creating new growth and even siphoning market share from traditional banks and credit unions. In response, these traditional lenders increasingly find themselves exploring the alternative lending market, but running into roadblocks.
According to an Accenture study, banks and credit unions are facing so much change in light of alternative lending that many are considering fintech partnerships that would allow them to adopt such practices for their own operational settings. By working with fintech disrupters, banks have an opportunity to rapidly advance their alternative lending capabilities without having to completely upend their longstanding loan services.
There are a few hang-ups in this transition, however, not least of which being that few people have a clear understanding of the alternative lending customer base. In a big-picture sense, banks understand that borrowers seeking alternative lending are often those who aren’t ideal candidates for traditional loans, but the lack of awareness about the nuances of these prospective clients creates a degree of risk that many firms may not want to tolerate.
To assuage this issue, TransUnion recently completed a major study that included creating and analyzing a database of alternative lending customers to identify how they compare with those leveraging typical loan services.
The makeup of alternative borrowers
The TransUnion study organized its findings relative to a variety of general beliefs about the alternative lending landscape. One of the most prominent ideas that the research investigated is that customers using alternative lending frequently carry more risk than those that engage in traditional lending. Based on the database, this presupposition is true, but not necessarily to such an extent that it should leave banks afraid of moving into the sector.
“30 percent of borrowers engaging in alternative loans would be classified as near prime or better.”
According to the research, more than 30 percent of borrowers engaging in alternative loans would be classified as near-prime or better using traditional credit scorecard models. While this is much lower than the ratio among the general population, where 75 percent of borrowers are near prime or better, it still represents a fairly large group of potential clients that traditional banks and credit unions may want to tap into.
The study also found that one common idea about alternative borrowers – that they are typically unbanked – is simply not true. The database created by TransUnion found that almost 50 percent of alternative lending customers have three or more open credit products from traditional sources. That figure is just over 50 percent for the general population, making. Similar ratios exist across those with two, one or zero open traditional credit products, pointing to a situation in which alternative lenders use normal banking resources just about as often as the rest of the population.
The major point of differentiation, the study found, was in the types of loans that customers relied on. Approximately 50 percent of borrowers present in the alternative lending database used traditional financial services for auto or personal loans. That figure is just 37 percent for tracked borrowers who are not using alternative lending.
Responding to the alternative lending opportunity
The TransUnion research provides key insights into the alternative lending customer base. Among those perspectives is the fact that borrowers that seek unconventional sources of funds aren’t averse to working with banks when the situation dictates doing so.
Banks and credit unions that want to embrace alternative lending models may want to turn to low-hanging fruit of services that attract alternative lenders in the first place. For example, implementing the analytics-driven digital model for auto loans could be a natural fit since many consumers using alternative lending already go to banks to borrow funds for vehicles. This would give banks a natural bridge between their service models and potentially make it easier to expand service offerings.
Of course, providing new lending options hinges on understanding the full scope of risk associated with borrowers. GDS Link can offer banks and credit unions the modern risk analytics systems needed to get started with alternative lending and develop the capabilities to identify non-traditional data sources that could be instrumental in identifying strong lending candidates.
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