Last month, the alternative lending industry was surprised by the news that Goldman Sachs was getting into the alternative lending space. According to unnamed sources, Goldman Sachs has built a team dedicated to bolstering their presence in the consumer and small business loans industry. If one mega-bank wasn't enough, a few months ago JP Morgan's CEO, Jamie Dimon’s made an interesting statement to their investors: "There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking. The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting. They are very good at reducing the 'pain points' in that they can make loans in minutes, which might take banks weeks. We are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense." It seems in the last year, the major players in the banking industry have started to look towards alternative lending and have seen both competition and opportunity. Banks + alternative lenders = more capital to small business During the great recession, banks turned away from small business, and started looking for loans of a million dollars are more. This left a huge gap that the alternative lending space has filled. Now, banks are starting to realize their mistake, and they’re turning back. They’re building strategies to win back these small businesses, and they’re starting to look at what alternative lenders are doing. This is a great thing for everyone involved. Even after the efforts of these alternative lenders, a lot of small business owners are still not able to get the capital they need. Even if we found a loan for every small business, the more capital there is available, the more the economy can grow. The stronger the economy becomes, the more small businesses are started. And with all of these new startups, they’re going to need more capital. It's a cycle that builds on itself. Small businesses live and die on loans of a lot less than a million dollars. Whether it’s a new truck for deliveries because the old one broke down, or a loan to get a construction business through the slow winter months, loans keep these small businesses alive and growing. Banks re-entering the small business space Small business owners are looking for capital, and they want it quickly and simply. The traditional lending process can often take weeks or even months while a lot of alternative lenders can get funds in small business owner's bank accounts within 72 hours. Not only that, alternative lenders are more willing to work with entrepreneurs who are looking for loans smaller than $100,000. Back in April, I had the chance to hear former U.S. Treasury Secretary Lawrence H. Summers talk about alternative lenders and how they’re going to shape the future market of small business lenders. He said that in the next decade alternative lenders (using technology that processes data that allows them to lend to borrowers that banks consider too much of a risk) could be responsible for as much as 30 percent to 40 percent of consumer lending, and up to 75 percent of small-business loans. That’s huge. When mega-banks (like Goldman Sachs and JP Morgan) and former U.S. Treasury Secretaries are talking about the alternative lending space and its impact on the economy, it's a positive indicator that alternative lending industry is doing something right. Competition or potential partners? Considering the amount of competition in the alternative lending space, and the speed at which these alternative lenders can move, is it realistic for a traditional bank to innovate fast enough to catch up and compete? The amount of regulation around banks hinders their ability to lend, and the amount of time it would take to get the technology in place would put them even farther behind. Instead, I'd recommend banks focus on partnering with the alternative lenders on the smaller, higher-risk loans (less than $250,000) and look to innovate / streamline the in the larger loan categories. When a small business owner comes to the bank and looks for a loan outside the bank's usual lending requirements, they can pass them to an alternative lending partner. Because the lending partner is a non-deposit lender, the bank can keep the deposits and the customer relationship while at the same time helping their customer to get the loan that they are seeking. This allows the bank to maintain the deposit relationship with the small business owner, monitor the growth of the business, then re-engage when the business can qualify for the bank's loan product. The small business owner wins When banks and alternative lenders start working together to provide access to capital for small business, the small business owner wins. With the experience, relationships, and muscle the banks have, combined with the ingenuity and speed alternative lenders bring to the table, the entire borrowing process will become a lot better for the small business owner.
Given the number of players in the alternative lending space and the speed with which they can move, Forbes questions whether traditional banks can innovate fast enough to and compete. It suggests outsourcing smaller to a non-deposit lender, with the technology to grant loans within 72 hours. This would enable banks to retain relationships and re-engage once businesses grow. The report also recommends that regulators should consider allowing lenders to issue bonds backed by their own equity.