Richard Carter, chief executive of Nostrum Group, explores how alternative credit providers can set the pace of innovation in consumer lending.
Despite UK Government initiatives, mainstream lenders have had lower appetites to lend to UK consumers. However, as demand has exceeded supply, mainstream lenders haven’t experienced the competitive pressure of considering how their products are distributed and managed. This change has allowed the alternative lending sector to emerge and gain a significant foothold in the number of consumers that it is servicing. Key to the success of alternative lenders has been the use of increasingly innovative technology, to such an extent that it now represents a significant challenge for traditional lenders to catch up.
Enabling quicker decisions
Previously mainstream lenders viewed credit reference agencies as the sole determinant for credit decisions. However, the explosion of Big Data means that alternative lenders have embraced new technologies which use algorithms to determine risk profiles in a matter of minutes and based on a combination of data sources. Everything from an applicant’s payment history to social media feeds, demographic data and professional connections can now be brought together to provide a holistic view of an individual and their risk profile. Using Big Data means that a lending decision can be made in minutes.
In addition, today’s consumers are quickly moving online and as a result there has been a sharp rise in the number of people that want the ability to make online applications for services, receive instant decisions on acceptance, enter into electronic contracts and gain immediate access to credit through faster payments that are delivered in a matter of hours. These tech-savvy customers also demand the ability to self-service over multiple channels with online services and smartphones having a big impact on the way that consumers manage their affairs. Over the last five years, alternative lenders have expanded their operations to include more of the online channels including email, on-line chat, SMS, web portals, twitter and other social media.
One area which has witnessed the benefits of embracing new technology is the payday industry which is now worth approximately £2 billion and has over 240 lenders operating in this space. The payday sector has acted early to get ahead of the game and offer today’s digital natives a quick and accessible experience. A combination of better algorithms, interaction design and multi-channel customer support means that almost half (49 per cent) of consumers that have taken out a payday loan claim that they are happy with the service and many Payday loan providers have higher net promoter scores than Apple and Google due to customer satisfaction levels.
Lowering the cost of credit
Alternative lenders are able to leverage their position as newer entrants to the market to gain competitive advantage. The majority of alternative finance providers have had the opportunity to refresh technology more recently and adopt new tools that reflect the way that customers service accounts. In contrast, traditional bank lenders are haunted by the issues associated with managing a complex system of legacy IT systems that form the basis of day-to-day operations – everything from managing risk, processing customer requests to data management.
In an economic environment where interest rates are low and funding costs vary, the margins that lenders are able to secure are thin. As a result, credit providers need to be able to introduce measures that lower operating costs, increase competiveness and lower the cost of credit across multiple channels. New technology can obviously make a big difference as it enables firms to replace manual systems with IT solutions that support a more automated, agile approach so that lenders can redirect resource to other areas of the business, reducing churn and decreasing new customer acquisition costs to help make the overall cost of credit cheaper.
The future of lending in the UK
As the take-up of ‘alternative’ lending continues to grow, its success and popularity among consumers will help propel it into the mainstream. A frustration with banks and a desire for alternative sources of finance will continue to drive growth of this burgeoning sector. In particular, peer-to-peer (P2P) lenders have experienced a sharp uptake and the Open Data Institute has predicted that the five-year old industry has provided £550 million of credit to UK business and consumers.
By matching investors directly with borrowers and cutting out the overheads of traditional banks, peer-to-peer sites can often offer more favourable rates both to lenders and borrowers who have struggled to get a loan elsewhere. As a result, the UK’s largest P2P lender, Zopa, has lent almost £260 million in just seven years and its competitor, RateSetter has lent nearly £50 million. Consumer’s willingness to adopt new funding platforms is helping alternative lending become established as a viable and accessible form of finance that is becoming disruptive to traditional bank lending.
However, for the alternative lending industry to become a bigger force and steal a greater share of the lending market, there will be a need to develop a more regulated market that prioritises the protection of client assets. Over the coming months, a key focus for the alternative lending industry will be how it can protect its longevity and boost its credibility by developing a market that keeps rogues at bay and ensures that any mis-selling scandals are avoided.