If You Lend, There Will be Defaults – Why AltFin Will Become More Like Banks

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You can't automate B2B lending 100% just on API, human element will always remain...20 year veteran in lending

I recently spoke to one angel investor who will remain unnamed that talked about the underwriting process at their particular alternative finance platform.  What he told me made me think why AltFin and credit will become a lot more like banks if they want to move away from very small dollar amount, volume based lending.  He said, “We had millions of pounds running through our system with no real financial or risk management or asset based lending experience.”  Think about that for a minute.  In essence what he was saying is we had no one that understood risk, collateral, loss recovery, etc. What we did understand was how to use software, scorecards and risk rating models to speed things up to make decisions to “customers” who many times remained faceless and were never met.

Very interesting business model you would say.  Certainly the credit card companies can get away with it, with their scalable consumer model of high rates which can absorb high loan defaults and chargeoffs.   But not lending, certainly not unsecured lending when you have no collateral to fall back on.   As I see it, in order for many AltFin vendors to avoid significant credit losses during a change in the credit cycle, they will need to build in more manual underwriting and stringent onboarding into their process, ie in essence become more like Banks.

In fact, some have already gone down that path and hired ex bankers or commercial financiers to put in a traditional focused risk team.

If you truly stress tested your loan book, what percent would make you uncomfortable?  Many lenders have loans that can turn into defaults if only a few things change in the business environment or for specific sectors.

The math is simple, you can make many loans but if one $2 million loan goes south, take control of defaults to recover the debt before it gets stuck in bankruptcy administration

The fundamental question remains - How can you be fast and disruptive but yet have the solid risk management capabilities? 

The talk has been how banks need to be more like fintech, but in reality, when it comes to business lending, perhaps fintech needs to be more like banks.

Because if you lend, there will be defaults.

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