The evolution of alternative lending funding models from the original peer-to-peer format into the future.
Alternative Lending of the Past
You’ve heard of driving while black, but what about banking while black? Our traditional banking system hasn’t always perpetuated equality.
Throughout the decades, millions of Americans have been denied funding or loans from traditional banks, including those with above-average credit scores and good payment histories. Anyone can be denied a loan if the economy isn’t doing so great.
Americans have always been innovative, though, so it’s not surprising that alternative lending businesses have popped up to fill a need. While these alternative funding companies haven’t always had the best reputation, the 2008 financial crisis and the rise of technology both helped change American’s perception of the industry as the evolution of alternative lending continued.
The Early Days of Alternative Lending
Alternative funding describes any type of lending activity that happens between a non-bank institution and a customer. These lenders don’t have banking licenses, so they’re able to offer different types of options for consumers. Technology also plays a huge role in alternative
lending because the transactions most often occur on online platforms.
Alternative lending can cover a multitude of debts like auto financing, business lending, and student loans. The first peer to peer online loan was written back in 2005 in the U.K. The trend caught on quick, and it first came to the U.S. in 2006.
While the trend started to grow in popularity, some predatory businesses started to employ some less-than-legal strategies against borrowers. A lot of these negative companies initially gave alternative lending a bad reputation. You must keep in mind that alternative lenders rarely have the long histories that banking institutions do. The whole industry is still relatively new.
How the Global Financial Crisis of 2008 Impacted Alternative Lending
Alternative lending was still in its early days when the impacts of the 2008 crisis started to surface. After the recession, new laws were put into place that required bankers to enforce more strict loan requirements. This new model meant that even more Americans were getting denied funding, even when they had very good credit scores.
As a result, more people started to turn towards alternative lending options. Banks have almost permanently decreased their lending compared to other activities. Despite an increase in the demand for loans,
banks have consistently been giving out fewer. Alternative lending, on the other hand, started
Tech over Traditional Banks
Another long-lasting impact of the 2008 crisis is a general distrust of the banking industry.
According to a recent survey conducted by the World Economic Forum, only about 28% of millennials believe banks are fair and honest. That means the younger generation (and beyond) are more likely to look at alternative lending options than go to a bank first.
Alternative Lending 2.0
2010 heralded the golden age for alternative lenders. Since the financial crash, there wassuddenly a vacuum to be filled. Potential borrowers needed financing, yet the banks weren’t in a position to offer a deal due to increased restrictions. At the same time, society was pivoting and beginning to trust online technology and businesses a lot more.
Now, alternative lending is a viable competitor to traditional banks. These companies threaten to outpace banks unless traditional banks begin to change their lending practices. Some of the biggest alternative lenders today include Quicken Loans, Kabbage, SoFi, and PayPal.
The Future of Alternative Lending
What will the future of alternative lending look like? Recent studies suggest that over 40% of customers felt that nonbanks can help them more with their investment needs than traditional banks. On top of that, 30% of responders said they’d be willing to try a nonbank option.
Keep in mind that these surveys were conducted prior to the 2020 crisis. If the 2008 financial crisis helped push alternative lenders to the forefront, then it’s likely that the 2020 crisis will do the same. Americans around the nation have been pushed to their limits. Businesses are struggling, and the economic recovery will take some time.
As a result, it’s likely that we’ll see a spike in alternative lending over the next several years. More Americans are trying to minimize their risks and save their assets due to all the uncertainty.
Not only will more people start turning to alternative lenders, but the industry will likely continue to improve, too. Technology like artificial intelligence, machine learning, and big data will all help lenders (and borrowers) make better decisions.