Alternative Lending Risk is About to Take Off
With successful IPO’s such as Lendingclub, we’re witnessing startups beginning to apply this alternative lending model to specific sectors such as mortgages and automobile loans. Startups like Autofi, Driverup, Lendinghome and Upstart are creating lending marketplaces that rely on non-traditional credit-history data.
Online or alternative lending is still relatively small and account for less than 1% of the total amount of outstanding loan balance. But it is the fastest growing segment with triple digit growth.
At the same time, banks have taken notice and reacting too. For banks, we’re seeing these traditional lenders becoming more branchless; the “thin branch” model will be the new normal where customers utilize Internet and mobile channels over face-to-face interactions. However, they still have a lot of catching up to do. Over 80% of banks with up to $10 billion in assets don’t have online applications, no instant approval process or no dynamic pricing; these things are must-haves in order to meet expectations of the new mobile-enabled customers especially the growing millennial segment who will become the borrowers of tomorrow.
Regardless of whether it is new alternative lenders or traditional banks, they both have the same risk management need: to manage risks which they’ve never experienced before, and in fact, no one on earth has. This is brand new territory and business models. This is where the need for the new technology – that is, the invisible and instant risk mechanisms powered by machine learning intelligence like Feedzai– is key to keeping lending safe. All of these developments require tapping into the increasingly growing “dataverse” and instantly learning about new risk and revenue models. We’re excited to be at the intersection of these trends.