It is great to see how technology is growing up. Alternative pathways are right now accessible to individual investors and small businesses instead of traditional ways. FinTech is making every financial need become easier and we have to take advantage of that.
Today, I would like to expose what is Alternative Lending and how that can help us.
To start, Alternative Lending is peer-to-peer lending that takes place through an online platform. This platform is making a marketplace where borrowers and investors converge.
There are different types of alternative loans, which depend on borrower need.
- Small business alternative loan which is boosted by the high requirements from traditional financial institutions.
- Non-bank loan mortgages where consumers can be benefited with lower cost and more relaxed criteria to get a mortgage.
- Peer-to-peer (P2P) loan. Quicker, cheaper and easier to find investors or borrowers.
This disruptive innovation is becoming popular when millennials and new generations are having financial needs. Their purpose is to avoid banks and get different ways to cover their needs. We grew inside the Internet Era and it could be easier for us to sign a loan entirely online. This industry will be relevant in the next few years. Meanwhile, the last period hit a total transaction value of 296B€ (Statista).
Relevant points to have in consideration
In this industry, there are 3 players; the online platform which provides the service and digital infrastructure with almost 0% commission; borrowers, who are people or business with financial needs to develop their business, buy a house or buy the new iPhone, as personal loan; and investors, that they are seeking to get a yield of their savings.
- Alternative Lending presents attractive yields (between 10-13% annualized yield on average) at the same time that it has a lower duration than traditional fixed income like treasury bonds. However, that yield comes from the level of risk. Understanding treasury bonds as the most secured assets (around 1% annualized yield), Alternative Lending loans are often unsecured, meaning default typically will be higher. So, the investor has to evaluate the probability of default and magnitude of potential loss to be sure of ratio yield/risk.
- You shouldn't follow the market volatility to determine the risk level of your investment in alternative loans. A report from Morgan Stanley shows how alternative loans are more correlationated with economy volatility than market volatility. This happens because this kind of exposure investment comes from customers and not from corporate and government credits exposure that determine traditional fixed-income allocations.
- Amortizing structure is, likely, the most important point in this post. It allows alternative loans to be extended to borrowers with a lower interest rate that might be charged in traditional loans like credit card loans. Everyone is looking how to get money with the minimum possible cost, and through this alternative it happens.
- As a second advantage, the customer behaviour has changed. People in their 30s grow up searching on Google and they can find cheaper financial support through a loan from a group of investors from wherever place of the world.
To summarize, technology along the financial industry is changing the form of how players play. It's being challenged for entrepreneurs to find creative ideas to disrupt inside a very traditional institution as banks are. Young people have the opportunity of being more friendly to this innovation than elder generations and we should leverage it.