Alternate Finance (AltFi) offers an opening for banks to grow into new markets. Some of today’s alternative lending models are still relatively new but they are expected to quickly enter the mainstream as the cloud industry grows and matures. Thus smart banking professionals don’t see AltFi players as threats, but rather as opportunities to collaborate, and create new products and possibilities for their customers. “Lots of banks have such incumbency advantages that it is hard to see a startup beat them head on,” says Sam Hodges, co-founder and U.S. managing director of Funding Circle. “Instead we’re seeing more FinTech players and banks working together to deliver innovative solutions and superior customer experiences.”
Four Strategies for Staying Competitive
Here are four ways banks can take advantage of this opportunity to stay competitive in the new financial services landscape.
- Implement Hybrid Lending Strategies
Hybrid lending enables banks to combine regular balance sheet lending with off-balance sheets through marketplace lending. With hybrid lending, banks create their own marketplace platforms and fund part of an otherwise unwieldy loan through the marketplace. This is especially attractive in sectors where the capital withholding, forced by regulations, are relatively high, such as when lending to small and medium-sized enterprise (SME) and real estate sectors.
Here’s an example of how hybrid lending works. A small business owner comes to a bank and files an application for Rs 50, 00,000 for his business. Unfortunately he does not meet the bank’s strict credit and/or profitability criteria, so his application would traditionally be rejected. But with hybrid lending, the bank can sponsor a part of the loan on its balance sheet that is within its risk appetite while listing the rest on its online lending platform, where investors lend the money off balance sheet, at a slightly higher interest rate. This hybrid strategy helps banks improve the customer experience and expand their credit while managing their risk.
- Partner with Marketplace Lending Platforms
There are two ways banks can collaborate with AltFi marketplace lending platforms. In the first approach, these platforms can serve as a distribution channel for the bank. Banks can leverage marketplace platforms by sharing loan applications that do not suit their conservative underwriting standards. This mutually beneficial arrangement enables marketplace lenders to access more borrowers while banks can leverage the platform’s technology to screen their current customers for consumer loan refinancing.
In the second collaboration strategy, banks can buy loans from AltFi players. Some banks find marketplace platforms to be an attractive avenue for providing funding for loans since they allow them to economically diversify into segments where they don’t traditionally lend.
- Create Your Own Marketplace Lending Platform
Banks can build public marketplace lending platforms to provide existing customers with quick access to credit and attract new borrowers. This approach can help banks operate without the burdens of legacy costs and fixed infrastructure, as well as to expand without opening new branches. Goldman Sachs has recently announced that it will launch a marketplace lending platform in 2016.
- Leverage FinTech to Complete Digitization
To compete effectively in these rapidly evolving lending markets, banks need FinTech technologies that are affordable, fast, convenient, and accessible. Simple loan-onboarding processes can guide consumers from application to funding in a few clicks. Unified lending platforms can easily integrate disparate applications, consolidate data, and allow decision makers to see the big picture. Having a cohesive lending platform removes complexity from the loan management process and improves visibility into lending operations.
Banks that have traditionally depended on legacy IT environments should consider adopting cloud-based configurable solutions that can transform the way they earn revenue and interact with customers. A cloud-based solution provides flexibility to respond to market opportunities, scalability to grow as business dictates, and multi-layered security to protect customer data.
By Snehal Fulzele, Co-Founder & CEO, Cloud Lending Solutions.
How banks will survive the lending revolution? This whitepaper proposes four strategies that banks can adopt to prosper in light of the rising success of alternative finance and peer-to-peer lending. Download our whitepaper here.