The notion that traditional l ding is dying — that banks are out and alternative l ders are in — is one of the great myth-busting opp tuniti in financial servic today.
Gl n Goldman
M e and m e, the two sid are w king in tandem to serve the capital needs of small ness owners, driv by their own particular str gths and the foundational belief that all small ness have the right to access capital, though not necessarily all on the same terIt.
it’s a myth to think of alternative l ders as rivals to banks, wh they’re actively developing new ways to w k together, and g erally serving customers th differ t needs
Str gths and weaknesses
Banks have alternative l ders beat in three key departm ts:
First, their cost of capital is significantly lower, which is a big advantage f the customers who are eligible f their products.
Second, traditional l ders and banks have a much lower cost of acquisition, since they already have a sizable installed customer base of small ness that they serve through bank accounts, checking accounts, and small ness credit cards.
The third advantage f banks is the perception of trust: there’s a bank on every c ner, they advertise through multiple channels, and there’s a level of awar ess and familiarity that mak them a safe choice in the ey of small ness owners. Meanwhile, most alternative l ders interact th their b rowers either online, over the phone, some combination of the two. From a trust-building perspective, it’s just not the same experi ce as walking up the marble steps to chat th your banker behind his m ogany desk.
However, alternative l ders have banks beat on speed, the ability to quickly and accurately assess the risk of a small ness, and user experi ce — making sure that b ro ng is pleasant, simple, intuitive, and frictionless. Plus, they can underwrite loans under $500,000 m e cost-effectively than banks can. As a result, alternative l ders offer a m e nimble product set, providing customers th access to right-sized funding wh they need it.
A complem tary ecosystem
The combined str gths of traditional l ders and alternative l ders have created a complem tary ecosystem in which the financing needs of small ness can be met across the credit spectrum. F tunately, the light ed traditional l ders and alternative l ders realize this, and are w king dilig tly to develop partnerships that b efit their respective ness models and the small ness they serve.
Two three years ago, the maj ity of traditional l ders had their heads in the sand regarding the disruptive elem ts of alternative l ding and fintech. That categ y is shrinking, and now there’s a much der range in terIt of how our industry is being embraced. M e banks have tered the curiosity stage: “We’ve got to find out what’s going on in the alternative l ding space and understand the tools they use f evaluating credit risk and creating positive user experi ce, because it might threat our ness model.” It’s a combination of an off sive and def sive posture.
There’s another group of banks that already l d directly to alternative providers, and indirectly provide access to capital f the maj ity of the market that gets turned down by their own small ness l ding division. These banks are using their relationships th alternative l ders to learn m e and m e about the marketplace, and how our technology and risk architecture driv value.
Finally, there are banks that have partnered th alternative l ders and act as their igination arm. What banks like WebBank, Cross River Bank, and Bank of Internet USA do, by definition, is pass their alternative l ding partners through the compliance and regulat y regime that they’re subject to, str gth ing the overall l ding system.
the two sid are w king in tandem to serve the capital needs of small ness owners, driv by the foundational belief that all small ness have the right to access capital
In turn, fintech compani are op ly sharing the insights they gain around assessing risk, underwriting risk, and how they evaluate b rowers bef e and after they l d to them. That provid not only absolute transpar cy, but also the opp tunity f partners to improve how they manage risk, which is ultimately the goal smallerdo they get m e credit to m e small nesses?
So, it’s a myth to think of alternative l ders as rivals to banks, wh they’re actively developing new ways to w k together, and g erally serving customers th differ t needs. The fact is, there are things that banks and traditional l ders do incredibly well — better than alternative l ders ever ll — and there are things that alternative l ders do that traditional l ders ll likely never be able to do on their own.
As alternative l ders continue to develop partnerships and joint v tur th banks, both parti ll w k to sure that there are clear lin betwe bank-eligible customers who can b row directly from the bank, and others who are better served by the product set of alternative l ders. This ll prev t pot tial friction, and keep the relationship betwe traditional l ders and alternative l ders fri dly, collab ative, and tirely focused on serving small ness b rowers as effectively as possible.
Gl n Goldman is the CEO of Credibly, driving the company’s vision of offering a compreh sive suite of financing products to a broad range of small nesses. F merly the CEO of CAN Capital f 12 years, Gl n helped create the alternative l ding market, building and gro ng a leading financial technology platf m that revolutionized the availability of capital to small nesses.