The Commercial Record is now featuring a new column courtesy of banking industry research firm Aite Group. Subsequent issues will cover the firm’s recent findings on the challenges facing financial institutions in today’s banking climate.
Since their emergence in the late 2000s, alternative lenders have been regarded as the most significant disruption to the lending business in recent memory, excepting the global financial crisis of 2008. With folklore and fear driving their perceptions of these new competitors, banks have responded with various combinations of denial, collaboration, competition, emulation and coopetition.
These firms are commonly feared and viewed as disrupters on par with the Ubers and Kindles of the world due to their reputations for superior customer service, fast turnaround times and rapid acquisitions of market share. But if folklore and fear were to be replaced by data and facts, what would an accurate perception of the alternative lenders be? And what, therefore, would be an appropriate competitive response for banks?
Aite Group in August 2016 fielded an online survey of 601 small to midsize businesses (SMBs) with annual revenue of $100,000 to $20 million. Of these, 501 had applied for a loan in the last two years. This population of credit-seeking SMBs was further divided into three populations: those that were found to be ambivalent about alternative lenders, those found to be averse to alternative lenders, referred to here as alt-averse credit-seeking SMBs, and those found to be friendly to these new lenders, or alt-friendly credit-seeking SMBs. It is the characteristics of these latter two groups – lacking in ambivalence about this new type of lender – that form the basis of this report.
Different Characteristics
In contrasting alt-averse and alt-friendly credit seekers, defining characteristics are found in areas that include their attitudes, business models, shopping characteristics, influencers and credit traits. There is also an observable difference in credit quality between alt-friendly and alt-averse credit-seeking SMBs.
Alt-friendly SMBs are more likely to be influenced by their social and professional networks: friends, family, colleagues, accountants and consultants. Traditional lenders, which have long used human networks, are in a position to use this skill set to deter alternative lenders.
Alt-averse credit-seeking SMBs are less interested in the digitized elements of the customer experience. Traditional lenders that create a customer experience that is overly reliant on digitalized processes are at risk of alienating credit seekers that are predisposed to borrow from traditional lenders.
Despite the commonly held perception that SMBs in retail are more likely to be alt-friendly, no examined industry vertical is more likely to characterize alt-friendly SMBs than any other. In their competition with one another, neither alternative lenders nor traditional lenders should target any single industry vertical more so than any other.
Strong Competition
Alternative lenders that have already entered the market could become stronger by tapping into the human networks that influence credit-seeking SMBs. Traditional lenders seeking to deter alternative lenders or recover market share from them will need to be cautious and develop new credit skills beyond those used to cultivate their current loan portfolios.
Traditional lenders should avoid an over-reliance on digitalization of the customer experience. Although digitalization is all the rage and financial institutions want processes that are simplified and rapid, alt-averse credit-seeking SMBs are less likely than their alt-friendly peers to view digitalized elements of the customer experience as very important.
Despite alternative lenders’ reputations as disruptors on a scale with Uber or Amazon, banks should be cautious in any attempts to take share from these new market entrants. Aite Group’s research found that alt-friendly SMBs as more likely to be credit-strapped; they are more likely to require debt to remain in business and to have had difficulty obtaining credit in the past.
Alt-friendly credit-seeking SMBs vary from their alt-averse peers in a handful of ways, including a tendency to be operated by a manager under the age of 50, an appetite for aggressive adoption of technology, a preference for digitalized processes and a higher average number of credit applications over a two-year period. Alternative lenders should use these and other characteristics within the alt-friendly credit-seeker’s profile to fine-tune their marketing efforts, pricing and customer relationship management.
To truly grow, alternative lenders may need to become strong where they are currently weak by tapping into the human networks that influence SMBs when they seek credit. In this process, SMBs that are alt-friendly are more likely to be influenced by friends, family, colleagues, accountants and consultants. These individuals, who are likely to be known by their local business banking officers and loan officers at traditional banks, will become the targets of alternative lenders.
If alternative lenders can influence SMBs’ influencers, they are more likely to become a trusted source of capital. Community banks can utilize the human networks they already have in place to capture additional market share.
David O’Connell is a senior analyst with Aite Group’s wholesale banking team, where he primarily focuses on lending. To learn more about Aite Group’s research coverage of retail and wholesale banking and payments, please contact Aite Group at info@aitegroup.com.
