I’ve frequently discussed how to improve the financial health of the 53 million Americans who do not have access to traditional, mainstream credit. In previous articles, I’ve explored the credit invisibles as a group, as well as concerns over predatory lending practices, to help set up the framework for the larger issue of financial inclusion (or lack thereof) and how market forces have reacted.
Our latest foray took us to Chicago for LEND360, where discussion was focused on the theme of “Intelligent Lending. Innovative Solutions.” The conference attracted burgeoning online lenders who were excited to showcase their position in the market. Most of these alternative lenders shared our goal to provide greater access to credit for the credit invisibles, unbanked, and under-served. And as the market continues to grow, they are also looking for more legitimacy as an industry. To become the alternative to alternative lending, if you will, by taking alternative lending mainstream.
However, as evidenced by the many discussions around high interest rates, unclear regulatory futures and other key issues, lenders are still grappling with how to get there. There’s general agreement that serving credit invisibles/under-served populations requires a different approach to underwriting, but the specifics of that approach are still being explored. With the current mainstream tools failing to address these key customer groups, it can be difficult to strike an effective balance between affordability, access and risk control.
To help solve for this, alternative lenders have increasingly begun looking to alternative data to help fuel more informed underwriting. And the good news is, with the prevalence of massive alternative database companies like LexisNexis, those insights can more closely mimic underwriting and other credit risk decisioning processes and performance of the mainstream lenders. In fact, more mainstream lenders are also recognizing the value of adding alternative data to their risk decisioning for more nuanced insights.
But as these alternative lending inputs become more commonplace, and more alternative lenders enter the marketplace, at what point can we officially deem it mainstream lending?
- Is it based on number of loans issued?
- Total loan value?
- % of the population that is relying on or falling back onto alternative lenders?
- What are the growth rates?
- And is it taking market share from traditional lenders or is it purely additive? (I hazard to say that it is both, but more of the latter.)
It will be interesting to see how homogeneous “mainstream” and “alternative” lenders become over the next few years. One thing’s for certain though, as alternative lenders try to figure out how to take alternative lending mainstream, the pathway will continue to be paved with alternative data.