There’s a massive opportunity right now for alternative finance companies to ramp up their lending. Macroeconomic pressures and the cost-of-living crisis have discouraged bigger banks from lending to trickier customers, leaving a need for credit that won’t go away. AltFis can step into the gap and extend that credit to those who badly need it. But to do so, they should ensure two things: first, that they can meet demand, and second, that they can manage risk. Both can be tackled with one key strategy: scaling. Only with scale will AltFis be able to seize opportunity and grow. And only with scale will they be able to handle the inevitable increase in defaults as economic volatility exerts its pernicious effects.
But achieving the necessary scale won’t be easy. Currently, the AltFi market is largely made up of multiple small-ticket lenders with the same goal - provide funds, relatively quickly. This means there’s fierce competition for customers since the lenders aren’t particularly differentiated. This lack of differentiation also means that the venture capital and private equity firms who would typically provide the funds for lenders to achieve initial scale don’t fancy parting with their money. AltFis have not sufficiently articulated their business case.
It’s clear that to achieve scale, AltFis need to differentiate themselves. They need a unique selling point. And then they need the technological capabilities to deliver on it.
That USP can be anything an alt-fi can reasonably deliver. One lender might say that they have the highest quality of assessment - maybe they leverage open banking or have access to more useful third-party data than others, to help screen and offer personalised terms to their customers. Another might differentiate itself with its excellent customer service - relationship managers who provide one-to-one care to customers. Still another might tell its funders that it’s uniquely nimble, with a lending approach that has flexible parameters based on economic conditions and customer circumstances. And one might reference its ability to launch new lending products to respond to need.
Whatever USP an AltFi might choose, it must be underpinned by best-in-class technology. Many AltFis so far have opted for self-development, building their own tech stack in-house. That may work for them now, while they service small segments of the market and offer relatively simple products, but it’s likely to be a serious stumbling block if they want to scale.
At first glance, self-development might look cheaper, but the truth is it eats money and ends up holding AltFis back. Easily half of a round of funding could disappear into developing the stack and paying the team. And then there’s the continuous cycle of maintenance and upgrades that sucks up staff time and cash - not to mention the risk of losing institutional knowledge if your developers decide to move on.
AltFis need to forget doing the tech themselves. Meaning they need someone else to handle it. It should be an enabler for growth, not a distraction from true business goals. Self-development could mean it becomes harder to deliver the kind of flexibility AltFis will need to keep pace. It won’t necessarily deliver quality know-your-customer assessments or be able to handle the volume of third-party data needed to make safe, fair loans a possibility. Self-development is not cost-effective and the technology won’t help AltFis approve and fund the highest number of applications in the shortest amount of time, whilst balancing risk and customer care. Simply put, self-development won’t let AltFis scale.
To take control of a substantial share of the market, attract investment, lend to and care for customers who need credit, and to minimise risk to the business, AltFis need to scale. And if I may be so bold, to scale they need a bright idea, not more software developers.
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