Much has been made recently of the rise of alternative lending and the potential threat the industry poses to established incumbents in the world of traditional banking.
Last week, Brock Blake, CEO of small business loan marketplace (and Dealstruck partner) Lendio, published an article reacting to proposed legistlation in the UK that would compel banks to refer rejected small business loan applicants to nonbank lenders as an effort to increase loan approvals and “to break open the dominance of high street banks in the small business lending market.”
This raises two interesting questions—one small and one large. First, should banks be forced by law to refer rejected applicants to alternative lenders? And more importantly, do emerging alternative lenders represent a threat to traditional banks? I think the answer to these two questions is decidedly no.
I agree with Blake that the U.S. government is highly unlikely to compel banks to refer rejected applicants to alternative lenders any time soon. It would be extremely tedious to enforce and regulate and it runs contrary to American standards of business deal making. As healthy nonbank options like Dealstruck expand their offerings, good commercial bankers will begin to see some alternative lenders as complements rather than threats. Already, bankers will refer creditworthy deals to other bankers if the style of transaction doesn’t fit their criteria (a bank specializing in commercial real estate that refers business to a bank that specializes in asset-based lending, for example)—although these informal handoffs are less abundant if one bank fears losing its depository relationship to another bank, as Blake notes.
In my experience, banks do not refer rejected loan applicants to alternative lenders for two simple reasons:
- (and other advisors such as lawyers, CPAs, and consultants) do not want to refer their clients to alternative lenders . You can bet a banker that is used to lending at 4-6% APR is going to be gun shy about referring deals to lenders whose APRs can exceed 100%.
Ultimately, good old fashioned branding and product development should do the job of hypothetical legislation. As banks become more aware of the offerings provided by alternative lenders, and as those offerings become healthier for borrowers, you will certainly see bankers become far more comfortable referring deals to alternative finance companies.