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ALTERNATIVE LENDING
Banks and alternative lenders - to compete or collaborate?
Alternative lending and Peer to Peer platforms are here to stay. The question then for banks is pertinent: Should we compete or collaborate?
Author V. Ramkumar, Senior Partner, Cedar Management Consulting International LLC
exceed $70 billion in the next five years, quite a sizeable number considering it was less than $5 billion in 2013 in the US. While there has been significant retail lending driven through multiple alternative lending platforms – including consumer loans by players such as Prosper, Avant and Lending Club, and also student loans by players such as Common Bond and SoFi, the key segment of significance has been the small and medium business industry. Prominent players in the SME segment being Funding Circle, Kabbage and OnDeck among others.
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A conservative perspective to Peer-to-peer (P2P) lending is that of disintermediation: while banks take deposits from customers and lend to borrowers, P2P lending, also known as marketplace lending, is all about making borrowers and lenders connect directly, leveraging their technology. A more practical view could also be that of this model serving a segment that was otherwise unaddressed, where P2P platforms help investors to purchase notes or securities backed by notes with borrowers.
The cost of compliance and import of regulations for the banks have also been a boon for alternative lenders. Consider this: the top 10 US retail home lenders in 2013 had just two non-banks in them, contributing 15% of that value. Five non-banks were on that list in 2016, contributing to 40% of the value.
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he P2P lending market is estimated to
New age, new way of lending
But what makes the proposition viable for the alternative lending model to make this sustainable? In simple terms, it’s the ability to harness big data, and use it to drive the cost of customer acquisition next to zero using social media and improve the spreads by keeping the non- performing loans (NPLs) levels low – driven through predictive credit analytics. Customers benefit from a simpler process, faster funding and full visibility to the status. It is interesting to know, though, that when two professionals with similar backgrounds apply for a loan, the one who is seen to be in the company of people with better credit scores and profiled with the right photographs on Facebook is likely to gain a better credit line. Welcome to new-age lending!
In essence, the core proposition is based on four fundamental differentiators:
• Financial - Superior Risk Management: Proprietary algorithms based credit scoring - using behavioural, transactional and demographic data to supplement traditional credit risk scores.
• Customer - Cost effective acquisition: Driven through engagement across social media, online portals and tools, and providing a superior customer experience
• Process - Simplified application: Quick 10-minute
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