The Rise of Non-Bank Lenders
When the Global Financial Crisis or ‘GFC’ hit many banks were caught with their pants down, finding themselves over-exposed due to poor risk management and overly generous loan-to-value ratios. As a result of this, banks had to change their policies which resulted in credit tightening up (i.e. banks being less prepared to lend).
Enter the Non-bank Lenders
To fill this gap left by the banks non-bank lenders started popping up who were prepared to provide loans where the banks weren’t comfortable or simply didn’t have the technological capability to understand their borrowers.
Non-bank lenders have now been around for many years, specialising in providing credit (i.e. loans) to individuals and companies that are prepared to pay a rate of interest commensurate with the risk profile. A key reason why the industry has grown so much is the innovation in the types of finance that can be provided, because let’s face it, there is an almost insatiable desire for credit globally (USD330 billion of demand in India alone).
Types of Non-bank Lenders
Innovative finance providers are now offering non-bank alternatives through a variety of methods including:
Cash flow financing
…and many others
Non-bank lenders in Australia include Latrobe Financial Group who provide home loans, Max Finance who provides business loans, and Australian Business Credit who provide loans in the form of commission advances.
The importance of ‘data’ in the future of non-bank lenders
A major reason banks struggle to keep up with non-bank lenders is that many have a major competitive advantage. Banks will typically lend based on either a personal or company balance sheet, some future projections, plus your credit rating. Savvy non-bank lenders on the other hand look at way they can use ‘data’ to improve the effectiveness of their lending practices.
The big advantage of lenders that have payments platforms with access to transaction data is that they not only can predict capacity to repay based on historical data, but they can also control the collection of monies. This means delinquency rates can be almost negligible in many instances – something that the banks often struggle with.
Sophisticated data analytics programs can collect a variety of data points on borrowers from multiple sources, then calculate a) how much to loan the borrower and b) on what terms. There are companies dedicated to the collection and interpretation of data for lending purposes, and the proof is in the pudding (see example below).
The future of lending
As banks continue to retract on their willingness to lend the market for non-bank lenders will only continue to grow. Those implementing data analytics capabilities will have a competitive edge and create opportunities for individuals and companies that they previously would not have had access to if they had approached a bank for a loan. Responsible lending will be done in an increasingly more calculated fashion over the coming years making it a very attractive sector for investment given the global demand for credit.
IPO Wealth’s parent company, Mayfair 101, is parent of an international investment and corporate advisory group with interests in 11 countries. Mayfair 101 is a shareholder in one of the largest B2B payments companies in Asia which is a non-bank lender to small businesses. They provide over USD250 million in loans every month for supply chain finance and have a delinquency rate of less than 0.001%. Their business utilises the power of data analytics to automatically calculate the amount and terms of the loans to create a win-win for the borrowers and the lenders.
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