The hybrid lending revolution: Mitigating bank risk via crowdfunding

Cloud Lending Solutions

Much has already been written about how the crowdfunding revolution is well underway, disrupting traditional sources of lending and giving consumers access to alternative sources of financing. Yet, for all the noise being generated, traditional lending is by no means going away any time soon. In fact, traditional and crowdfunded lending sources have been working in tandem to provide novel lending products to consumers.

“Veenstra calls for the initiation of ‘hybrid lending.'”

“Banks are challenged on the domain of lending by these new low-cost challenger platforms, backed up by venture capital and institutional investors,” writes Auke Douwe Veenstra, Head of Europe & SA at Cloud Lending Solutions in BankNXT. “As a line of defense, incumbents should join this movement, as it solves a lot of their problems, such as capital allocation and more importantly reputation.”

Veenstra calls for the initiation of “hybrid lending.” This would mean that banks and other traditional lenders would offer to finance a portion of loan — say $60K of a $100K loan — while turning to a crowdfunding platform to finance the rest. This can dramatically limit risk while optimizing balance sheets. It also allows banks to mitigate Basel 3 & 4 solvency requirements.

“Right now, banks have two choices to comply with Basel 3 &4: Reduce their portfolio by selling off assets to comply, or restrict making new loans to the least risky market segments,” writes Veenstra. “Neither option is attractive compared to the new hybrid lending these innovative banks are moving toward.”

For banks struggling with economic factors and high-risk driving limited lending capital, this offers relief from having to increase and improve their capital holdings dramatically. With traditional lending and crowdfunding platforms working together to help finance consumers, all parties benefit from the relationship.