Alternative Lending in 2020 and Beyond: Trends and Predictions
As always, Armada Labs keeps hand on the pulse and glad to share the latest insights with you! For today’s article, we collected five important predictions about what alternative lending will look like.
What is happening with alternative lending right now? New lenders are likely to supersede incumbents unless they make a change and adopt technologies or collaborate with the former.
“Fight or flight” already became a tenet in a sense, so this is not our topic today. Instead, we will discuss where alternative lending is heading in the years to come. Of course, we are guided by the latest events and the status quo in the lending sector.
Non-lenders will Continue Taking the Market
Amazon gives loans to small businesses, Apple launches its own credit card, Square Capital provides credit to small businesses and receives automated repayment through its own POS lending system… The list of examples is still short, but you get the idea: non-lenders go lending.
The figures speak better than the words; Amazon revealed that from 2017 to 2018, it lent around $1.5bn to SMEs, while Square Capital gave loans in a total of $5.5bn over the last five years with 3.5 m Square cardholders. PayPal, for instance, lends over $1bn every quarter.
The next decade promises to engage even more big companies in lending. Since those can leverage Big Data to grasp more information than ever, they may offer different lending options, among other novelties.
However, we anticipate that these services will be centered more on the current audiences of these companies. For example, Uber now works on financial services products for customers and drivers. Both can already create an Uber bank account and make payments via a dedicated banking app, using an Uber debit card.
In the meantime, Google plans to provide checking accounts for Citigroup’s users and those at Stanford University’s credit union. The service is expected to provide seamless digital account opening, real-time personalized offers for users, financial insights, and more.
The End of Payday Loans
For the relatively high cost of payday loans, most consumers hesitate to take these.
Soon, more innovative solutions are going to replace payday loans, offering more efficiency, convenience, and, of course, reasonable costs.
What we are facing now is the “data-driven” future. In the past, the loan origination process was challenging for lenders; it took time to collect data from multiple sources and money to originate a loan and underwrite it.
And now, the data can be collected in minutes with the right automated solutions at hand, which cuts operational costs and allows giving loans at a much lower price. Several paycheck startups already work on the solutions that should facilitate data collection from payroll services and even provide more information than before.
AI-based Monitoring of Loans
You might not notice or have not paid the deserved attention to that, but smart assistants are entering our lives more closely. Self-driven vehicles, IoT-connected homes, even smartphones, change our lives, seeking to bring more convenience to it. At some point, we will likely see the same assistance in lending.
And though these are predictions so far, let’s think about the following possible case: AI-based loan monitoring. Today, small lenders are forced to talk to each consumer personally to detect the possibility of default. Over time, a shift can be made towards intelligent spotting of macroeconomic trends and monitoring consumers’ financial histories.
By the way, intelligent credit scoring algorithms are already available in some lending solutions, helping lenders to predict if the consumer is eligible for a loan. Similarly, they help detect lenders to prevent default and work out a back-up plan, with alternative loan offers that could fit the consumer’s pocket.
China to Take the Lead
By now, China dominates in almost every fintech category, and lending is not the exception. Make sure of that yourself.
No surprise, whatsoever, since China has more internet users than any other country in the world. Combine the population of, say, the U.S, Mexico, Russian, and Japan, and China will prevail in this regard anyway.
Of course, several factors play (and will keep doing that in the future) in favor of China’s dominance. On the one hand, this is the leadership in the eCommerce sector; on the other — China’s increasing role in international lending, in LatAm in particular.
With these ambitions, China won’t succumb to anyone in the race for the consumer. At least, there is no reason to suspect otherwise.
More Loan Types from Challenger Banks
More and more challenger banks in the U.S. pave their way to the financial services sector. N26, Varo, Chime, MoneyLion, and others already claimed that goal in one way or another. Chime, for example, offers consumers a credit card, with reports on the following financial activity regularly sent to credit bureaus. In the meantime, Varo is planning to do the same soon. Additionally, both plan to introduce robo-advisor services.
HMBradley, a relatively new online credit platform launched early this year with investments from Affirm and PayPal, offers various types of loans, including auto and home ones. The convenience and affordability of loans are the core values in the company’s vision.
Why do challengers make such a change? Retention is, perhaps, the main reason for that. Tick all the boxes, meet unmet needs, and receive high profit — there are the most likely goals. And though the competition is tough, there’s still room for challengers. Unlike fintechs, they don’t have to build a service from scratch; instead, they build up the new one on the current consumer base, adding further value to existing services.
The Future is Now
From the earlier predictions, it’s clear by now that alternative lending is a budding, thriving domain that will grow by leaps and bounds. In a few years, online lending will become smarter, more versatile, and more affordable as big companies have a keen interest in this domain and already play on the same field with some startups. Is it an uphill battle from the start? We wouldn’t be so sure.
It looks like China will carry the flag of leadership in this technological race, though other countries may try to repeat its success. What will this competition look like in the end? We won’t say with confidence until we see, but it will be exciting to watch.
