One of the biggest threats to the banking system comes from non-banks and alternative lending firms. With the use of technology, alternative lenders are breaking into the market and succeeding by providing efficient and effective loan services to companies and people who have been previously underserved.

If you’d like to learn more about alternative financing and how it’s challenging the dominance of traditional financial institutions, please read on.

What exactly is “alternative lending,” and how does it differ from traditional lending

It is common for small companies that are unable to get funding from regular banks to resort to alternative lending – when money is loaned from sources other than banks. Financial companies that do not have a full banking license, such as nonbanks, provide a variety of loan choices for small enterprises.

Nonbanks may provide traditional bank services like credit card processing and a wide range of financing options, such as mortgage loans, for their customers. Loans are simpler to get from these lenders, particularly those without the most significant credit or who don’t satisfy certain conditions.

Trends in nonbank and alternative financing

A growing number of digitally sophisticated non-banks and alternative lenders pressure established financial institutions to digitize their own lending choices.

Over 40% of respondents to Oracle’s Digital Demand in Retail Banking survey believe nonbanks can better assist people in managing their money and investing.

Small and medium-sized firms, in particular, are paying attention to alternative lenders (SMBs). According to statistics from the SME Finance Forum, there was a $5 trillion funding gap between SMBs’ financing demands and the institution-based credit available to them in 2018.

Insider Intelligence’s SMB Lending Report highlights that if incumbents don’t investigate technological developments, alt lenders might begin grabbing a more significant piece of the industry.

Non-bank loan types

There is a wide range of loan choices available to people and enterprises from non-bank financial institutions.

Non-banking mortgage financing

Traditional banks’ incapacity to adapt to the digital world has resulted in a rise in the number of alternative lenders providing mortgage loans to customers because of the regulation of mortgages.

In 2011, the top five US banks — Bank of America, US Bancorp, Wells Fargo, JPMorgan Chase, and Citigroup – accounted for 50% of all mortgage originations.

Incumbents fear alternative lenders because they may provide conventional financial products, such as mortgage loans, at cheaper costs and with fewer restrictions on who can qualify. With this and their technical solutions, alternative lenders can provide mortgage loans more appealingly than traditional lenders.

Different kinds of financing for small businesses

Traditional financial institutions often reject loan applications from microbusinesses and small businesses. Alternative lenders can take advantage of the strong demand for small company loans because of the laxer restrictions that apply to them.

The Federal Reserve Bank of Richmond found that just 58% of small company loan requests were accepted by incumbent banks in 2016, compared to 71% authorized by alternative lenders in the same year.

With machine learning and a wide range of data, alternative lenders can go farther into the small business financing sector than conventional lenders.

Peer-to-Peer (P2P) loan

Alternative lending models such as peer-to-peer (P2P) bring together borrowers, investors, and a lending partner online. P2P systems use variables such as credit ratings and social media activity to connect borrowers and lenders.

As a result, P2P lending platforms can keep their expenses down by facilitating connections without controlling the loans. Customers seeking the lowest possible interest rates on their current loan find this feature especially appealing. Click here to go on gadcapital.com

The market for non-traditional loans

Even while conventional banks still control most of the market share for business lending, growth has continued to decrease, suggesting an increasing desire for alternative lending platforms. Using AI and machine intelligence, alternative lenders can enroll consumers more quickly.

Insider Intelligence’s SMB Lending Report states that small and medium-sized companies (SMBs) comprise virtually all private sector enterprises in the United States and employ 60% of the workforce. SMBs, on the other hand, sometimes have difficulty getting loans from traditional banks, so they resort to alternative lending platforms.

Suppose conventional banks do not modernize their lending operations to keep up with the tremendous growth of the SMB market. In that case, alternative lending firms will be well-positioned to challenge the current market leader: the bank.