Alternative Lending: Why It’s Time to Look Beyond Traditional Banks
You go to a bank to deposit, withdraw or loan money, generally. But what if there were alternatives to a bank? Below Finance Monthly hears from Bruce Rayner, CEO at consumer finance specialist, Duologi, on the extensive network of alternative lending.
Consumer trust in banks has plummeted in recent years. The 2008 financial crisis, as well as recent examples of bad practice such as TSB’s IT meltdown which compromised millions of accounts, has led to many consumers questioning whether their bank really has their best interests at heart. Indeed, RBS chief Ross McEwan recently predicted that it could take up to a decade to rebuild lost customer trust following decades of poor treatment.
In fact, as many as one in five customers (20%) no longer trust banks to provide them with a loan – ostensibly one of a bank’s primary functions.
Despite this mistrust, consumer appetite for credit remains high. We’re therefore seeing a rise in alternative lenders offering customers the flexibility and transparency customers desire – and which many traditional banks have conspicuously neglected – which could spell the end of the traditional banks’ role as leaders in the lending sector.
But how has the lending process evolved and what does this mean for traditional banks?
The rise of new consumer lending models
While consumers are willing to borrow outside of traditional banks in the wake of these institutions having cut back on unsecured lending, they will no longer trust a provider which does not operate transparently or ethically – as evidenced by the collapse of Wonga. This, combined with recent regulatory action from the FCA, has heralded a wave of change within the financial lending sector.
Following the lead of disruptive, digitally-focused providers such as Uber and AirBnB in other sectors, a number of fintech disruptors – such as Atom and Monzo – have materialised. These brands have analysed the day-to-day banking issues customers face – such as a lack of transparency and poor user experience (UX) – and designed their services from the ground up to mitigate these issues.
From taxi apps that invite you to register a payment mechanism, to autonomous vehicles that pay for their own parking or motorway tolls, “banking” without the need for a bank will gradually become a more everyday experience. In this vein, so too will consumer lending change through organisations that offer finance at the point of sale itself – both online and in-store – moving from traditional pre-purchase credit to a far more seamless service.
Flexible point-of-sale lending is changing the nature of financial transactions across a range of sectors, including how to fund a holiday, buy a house, and even pay for medical treatments at a rate which suits the customer. The potential of this lending method is huge, with more than three quarters (78%) of consumers saying they would consider using point-of-sale credit in the future.
What does this mean for traditional banks?
People seldom wake up in the morning thinking “I must do banking”. Banks don’t tend to inspire the levels of consumer loyalty seen in other sectors, and they must therefore work far harder to retain customers. Given this, the ongoing reticence of banks, to both lend and offer customers what they want, has created a gap in the finance market, which could be the death knell for traditional banks if left unchecked.
As frictionless point-of-sale lending businesses and customer-centric fintech brands continue to thrive, several key banking functions – such as money management and consumer lending – may be replaced entirely by newer, more agile providers. For example, could the fact that providers are now offering finance in the property sector put an end to the traditional mortgage?
If this growth of smaller, more agile disruptors continues, banks are highly likely to see reduced customer numbers. It was recently predicted that banks could lose almost half (45%) of their customers to alternative finance providers, and if banks do not adapt their offering there is a real danger they may be driven out of the market altogether.
Simply put, if banks do not place a greater focus on what customers want – flexibility and transparency – their status as the stalwarts of the lending market may soon be a thing of the past.