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Alternative SME Finance Just Might Survive In 2017

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Earlier this month, marketplace lending site Biz2Credit released the findings of its most recent small business lending index. The data revealed that SME loan approval rates at big banks were at an all-time high, hitting 23.7 percent in November. Small banks saw their loan approval rates tick up, too, to 48.8 percent. Meanwhile, approval rates among alternative lenders sunk down, a finding that Biz2Credit CEO Rohit Arora said could be a sign of negative times ahead.

“CAN Capital, one of the largest and oldest players in alternative lending, has stopped lending and replaced CEO Dan DeMeo,” he reflected in a statement. “Alternative lenders have lost favor because of the rates they charge. Meanwhile, they lost much of their competitive advantage of the speed of their decision-making as other types of lenders continue to invest in technology to expedite the loan approval process.”

Arora’s doubts over alternative lending aren’t unique. This week, Financial Times reported a shift in the sector that sees alternative and P2P lenders turning more into traditional lenders, with companies like Zopa seeking out banking licenses in the U.K.

“P2P only works on a small scale,” one industry expert told the publication. “There is not enough demand for credit to grow it enough, and so, they have to act like banks.”

Meanwhile, in addition to CAN Capital’s recent struggles, another alternative lender, Argon Credit, reportedly filed for bankruptcy protection this month.

Is 2017 the year alternative lending will collapse? PYMNTS decided to speak with Biz2Credit’s Arora to gain more of his insight into the future of the alternative business lending landscape.

“I think there will be more consolidation in the market,” he said. “A lot of the alternative lenders were dependent on ISO affiliates and brokers to source deals, and customers are moving away from that trend.”

There are aspects of alternative lending, however, that remain attractive to prospective borrowers, he said.

“More of the borrowers are seeking faster responses and are applying for funding online and digitally,” the CEO and cofounder explained. But that doesn’t mean alternative lenders that finance their borrowers directly are attractive enough to remain viable. “Unfortunately, alternative lenders have not made the types of investments in technology that other categories of lenders have been making.”

Banks, on the other hand, continue to invest in technologies that mean traditional institutions can offer borrowers the same online experience and speed that became alt-lending’s key proposition.

“As banks are starting to get better at their digital strategies, they will start gaining momentum with the implementation of digital offerings to borrowers,” Arora said, adding that, along with consolidation, SME lending will see greater competition in 2017.

Part of that trend stems from market conditions arising in the new year.

“The economy is expected to do better, so we are going to see more demand for financing as business owners get more aggressive to expand their companies,” the executive said. “The recent interest rate hike will result in a larger appetite for banks to approve funding for loan requests. The good news is that this will lead to more needful credit.”

On a positive note for alternative lenders, though, regulation is unlikely to crack down on the sector.

“I don’t foresee increased regulation on alternative SME lenders,” he noted. “In fact, there will be less suspense about new regulation being introduced with the incoming Republican administration. The Office of the Comptroller of the Currency establishing a new set of guidelines for FinTech players becoming FinTech banks will lead to greater clarity on the regulatory side. This will sort out the long-term players in this space.”

Greater clarity and stability on incoming regulatory pressures for the industry mean the sector won’t likely go entirely defunct altogether. But market consolidation and greater competition from traditional lenders will quickly sort out the winners from the losers in alternative SME finance. According to Arora, that means 2017 will certainly be a challenging year for the space.

“The cost of acquisition for alternative lenders is still very high,” he said. “Alternative lenders will need to find out how to work with banks more closely because they are gradually increasing their commitment to small business financing.”

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