Who Will Survive The SME Lending Boom?

The alternative lending sector was born from a need among small businesses for working capital when large financial institutions took a step back. Today, there are hundreds of lending options for small businesses, traditional and alternative, all scrambling to meet the complex and varying needs of an entrepreneur.

It may seem like the market is a bit crowded. Is there enough room for everyone in the market? Yes and no, says Brock Blake, CEO of alternative lending platform Lendio.

Blake spoke with PYMNTS about how traditional lenders can still fit into today’s tech-savvy, digital SME financing landscape and why not every alternative lender will survive the current boom.

Where Banks Fit In 

The discussion surrounding alternative lenders has been one that largely places these new players in direct competition with banks. After all, if a traditional bank fails to provide a small business with a loan, an alternative lender will win over that market share.

But Blake envisions an ongoing role for large financial intuitions in the small business lending space; it just may look different than it has in the past.

For example, he said, banks are likely to strike new partnerships with alternative lenders. “Banks may say, ‘OK, I don’t necessarily want to fund or underwrite the types of businesses that an alternative lender will fund, but I don’t want to turn a customer away for fear I might lose that customer’s deposits and their accounts,’” Blake suggested.

It’s a scenario that would see traditional banks referring their small business customers to partnered alternative lenders for small business loan products, meaning both players get their share of the SME customer base. It’s already happening, most notably in the U.K., where regulators have implemented a bank referral scheme, encouraging banks to refer small businesses that have been rejected for a traditional loan to an alternative lender.

But there are more ways that banks and alternative lenders will coexist, Blake said.

“Banks will take confidence around the underwriting of certain lenders, and they will white label, or license, the underwriting technology of that alternative lender,” he explained, adding that banks may begin to work with alt-lenders for the technology — data aggregation, analytics, digital banking services — for the benefit of their existing customers.

Lastly, banks will begin working with alternative lenders by providing them the capital they need to loan to small businesses. It’s a process, Blake explained, that is a win for all parties involved: Banks can offer cheaper credit than a private lender, making for a better deal both for the alternative lending platform and for the borrower.

There is room in the market for both banks and alternative lenders to coexist because collaborations between the two sides will be on the rise, Blake said. But they can also coexist because they offer holistically different experiences for different customers.

Blake said that when it comes to the sophisticated credit assessment and online tools in use by alternative lenders, while traditional banks will begin to implement these tools, by the time they do so, alternative lenders will be on to the next iteration of technology. But, Blake said, that’s probably a good thing.

“I’ve worked with banks long enough to know that there is some inherent advantages for them, but technology and innovation is not one of them,” Blake said. “And the reality is they probably shouldn’t be the most innovative organizations in the world because they have to be steady, safe, sound organizations — because our financial system is built on them.”

So, while banks and alt-lenders will surely collaborate, traditional lenders, Blake said, will need to stay the course in terms of providing traditional services, leaving room for alt-lenders to be the innovators. 

The Alt-Lenders That Will Survive — And Those That Won’t

So, if banks can coexist with alternative lenders, everybody is happy, right?

Not exactly, Blake explained. Within the alternative lending space, there are so many players emerging that, he says, Lendio is approached by at least one new player a day asking to integrate into the Lendio platform.

And in some ways, Blake said, the small business lending market needs a high number of players.

“There are many different ways to underwrite a business,” he said. Blake offered equipment financing, for example. Not only is equipment financing just one type of small business loan, but there are also different underwriting processes for medical, restaurant and trucking equipment lending. The same goes for accounts receivables financing. AR financing may be one sub-genre of small business loans, but there are different types of AR financing tools — purchase order financing, invoice financing and the like.

“I don’t think that will ever go away,” Blake said of the dizzying array of small business loan types. “I actually think there will continue to be lenders that pop up and say, ‘OK, I’m going to find a new way to underwrite a certain niche within the spectrum of small business lending.’”

But that doesn’t mean there is a space for every small business alternative lender that emerges on the scene.

“That being said,” Blake continued, “when there are a lot of lenders within those niches, there is duplication. I do believe there will be consolidation, where there will be a few winners, and the rest are either going to go away or [be] acquired.”

With regulators beginning to eye the alternative lending space with a bit more moxie, Blake added that government officials will be looking to protect small business customers, ensuring they are educated on the risks and the terms of their loan products.

But as far as the way the competition rolls out, Blake said that it’s largely up to the market itself, where banks and alt-lenders both compete and coexist and where alt-lenders themselves endure both niche development and consolidation.