Future of Banking: Alternative lending is going mainstream. So now what?

Alternative lenders are not so alternative anymore. LendingClub Corp., which once appealed mostly to early adopters, has become a household name. Prosper Marketplace, Inc. has funded more than $5 billion in loans. Goldman Sachs reports that alternative lending could put an estimated $11 billion in banking sector profits at risk through 2020.

More than 75 start-ups have built websites that match investors with borrowers seeking loans to pay down debt or finance a big purchase. Alternative lending is a rapidly expanding global phenomenon, especially in the United States, the United Kingdom and China—with signs of emerging growth in Germany, Spain, Australia and Canada.

As consumer and small and medium business (SMB) lending shifts from traditional sources to emerging ones, banks must seize opportunities to avoid disintermediation. Like it or not, alternative lending is part of the future of banking.

Silicon Valley Meets Wall Street

The alternative loan market arose from a perfect storm of forces—another example of banking industry disruption. Non-bank lenders have the advantage that they are not bound by the cost of branch infrastructure, reserve requirements and regulatory overhead. So they can pass along lower overhead costs to borrowers through lower interest rates.

Alternative players’ business models are grounded in digital technologies—from end-to-end digital services across all channels to the infusion of credit-focused analytics. They are also using social media and other data to help determine degree of credit risk for prospective borrowers.

A Strong Appeal to Customers

Alternative lenders’ use of technology enables them to offer a strong customer experience in origination and fulfilment—fast, personal and convenient. Consider how well these digital disruptors perform against important credit and lending metrics:

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Even so, alternate lenders face unique risk factors in addition to borrower credit and interest rate, liquidity and regulatory risk.

Banks Can Go on the Offensive

There are several strategies that traditional banks can pursue to match the service levels and customer experience that alternative providers deliver. These approaches include:

  • Go digital. Develop in-house digital capabilities for consumer and SMB lending.
  • Tap into digital. Build partnerships with alternative providers.
  • Connect with new investors. Partner with new financial institution investors.
  • Make acquisitions. Leverage third party balance sheets and network effects.

In these approaches, banks have the advantage of their lending experience, sophistication, and “trusted partner” brand status. However, banks must be willing to work with multiple players to build both sides of the marketplace.

The Benefits Add Up

The upside here for banks is the opportunity to drive net revenue growth, create new delivery efficiencies, sell and market to a new group of investors, get new insights on consumer and small business funding needs, and create barriers to entry for emerging players. All of this is essentially about beating alternative players at their own game.

In doing this, banks can evolve customer relationships too. They can extend their role beyond providing financial transactions. With more tailored customer experiences, banks can build advice-based relationships and support customers’ everyday needs.

Our research, Banking Shaped by the Customer, indicates that consumers are hungry for more personalized, digital experiences that support how they live, not just how they bank.

A Look to the Future

Alternative lending is a trend to watch. It is already reshaping lending tradition, and will shape the future of banking. Traditional lenders should monitor this market closely and act on the clear opportunities to thrive in this dynamic market category.

David Edmondson

Senior Managing Director, Accenture Banking
David Edmondson is the Senior Managing Director of Accenture's Banking Practice in North America and is responsible for the growth and strategic direction of Accenture’s business. Mr. Edmondson holds account leadership roles with some of our largest Banking clients in North America. He has helped to develop go-to-market offerings and architected and delivered strategic transformation initiatives across all of Accenture’s Service Groups in 11 different countries. Mr. Edmondson spent the early years of his career at Accenture focusing on clients’ Consumer Credit business including Card, Mortgage and Consumer Lending.View all posts by David Edmondson

2 thoughts on “Future of Banking: Alternative lending is going mainstream. So now what?”

  1. Great post David. Completely agree with the point around building networks of alliances, as we’re definitely seeing with some Banks in the UK. For example, Santander and RBS both have partnerships to refer SME lending to Funding Circle. Interesting to see how that works longer term in the operating model…

  2. Great article. Another part of the CAC longer-term equation is appropriate risk-based Pricing (Interest Rates). Right now the big platforms (Lending Club, Prosper) are a moving target when it comes to Base Interest Rates relative to their own Internal Ratings.

    Seems consumer loans are saturated and high-interest SMB loans. It will be interesting to see how private lenders or P2P are able to distribute: (1) working capital solutions through their banks, particularly small business B2B invoice clearing and (2) small business acquisition loans in lieu of the SBA 7(a) program.

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