Fintech innovation and the alternative finance space

The world of fintech has opened up a whole new world for those seeking different forms of finance. From BNPL and cross-border services to Open Banking and investment platforms, managing money has never been more flexible. 

Defining alternative finance

Alternative finance is a blanket term that refers to any type of financial service managed outside the parameters of the traditional banking system. These services are driven by fintech and are part of a swiftly growing network of service providers that are linked to the digital ecosystem. 

Fintechs utilise the latest technologies, including AL, ML, blockchain, DL and more, to deliver fast, flexible and secure services for both B2B and B2C customers. 

Why has alternative finance become so popular? 

In a nutshell? Innovation and lower cost services. 

Traditional banking services have failed to address demands in the marketplace for better financial service options. Incumbents have often proved to be inflexible, expensive, and archaic in terms of their business and consumer offerings.

Jack Trowbridge, Commercial Director at Growth Lending, says alternative finance exists to plug the gap where SMEs have been underserved by traditional financiers. “As the cost-of-living crisis and recent market turbulence continue to impact businesses across the country, this gap is only going to widen. The alternative finance space has a critical role to play on two fronts: accessibility and speed.”

Trowbridge points out that, “as traditional lenders begin to pull the drawbridge up, having access to finance via alternative means is going to be critical”. Moreover, he believes the alternative finance market has the ability to move much faster and with a more streamlined approach than traditional incumbents.

Non-bank loans becoming more attractive to customers

Melba Montague, Senior VP of Banking and Capital Markets for Genpact, agrees, predicting that as the global economic slowdown continues, customers will increasingly choose alternative finance solutions. “With rising inflation and costs of living, the current economic climate is anticipated to worsen over the coming months. As cash and disposable income become tighter, we will see increasingly more people turn to non-bank loans as a means of alternative finance, with BNPL models expected to feature prominently.”

But, she points out, the BNPL industry is unregulated, decentralised, and brings risk to consumers borrowing beyond their means without adequate financial advice. 

She continues: “Arguably, BNPL has made it easier to create debt, and it needs to be tackled as more structured regulatory models become developed. As such, it's critical that banks educate the consumer to avoid exacerbating an already fragile cost-of-living crisis.”

Other lending services will see an uptick in demand, too. 

Mortgages are a prime example because alternative mortgage lenders have different lending criteria than big banks, and could therefore provide a way to approve loans when customers don't meet the requirements for a conventional mortgage. Examples of these lenders include private mortgage lenders, credit unions, monoline, and 'B' lenders, and smaller banks.

New alternative finance trends for 2023 and beyond

As the popularity for fintechs like Liberis suggests, alternative finance – and lending especially – is a developing space. It’s a thriving industry that has become an essential part of financing SMEs, particularly in the wake of digital transformation and on the back of the pandemic. 

Peer-to-peer lending is also skyrocketing as it extends its services to encompass lending opportunities for businesses as well as consumer loans. This is set to increase further due to better regulations building more trust in the sector. 

New technologies such as AI and ML are also driving success. They allow for automation and have improved risk analysis significantly, enabling them to confidently stride forward and scale.

Alternative lending packages will be 'a thing’

Market indications also suggest that the alternative financing space is growing so rapidly, that very soon – possibly even in 2023 – a new, secondary market will emerge in terms of alternative lending packages. In short, this will consist of small ticket loans that will be sold in packages with other services and purchased by large-scale lenders as a means to reduce risk. 

Investors interested in alternative finance

While the investment market continues to be flat – and much tougher than in recent months – one area analysts believe will thrive, is the alternative finance space. This is because cash flow is essential in keeping the lights on across global commerce, and providers that can facilitate such services with speed, efficiency, and lower costs, will continue to thrive – and, therefore, garner interest in the investment space. 

We will see more fintech partnerships emerging

And not just partnerships between fintechs and technology providers, but those between incumbents and innovative startups. 

In his recent write-up for Forbes, Chad Otar, who is the President at Lending Valley, Inc, explains: “Legacy banks and traditional lenders that aren’t interested in purchasing alternative financing companies outright are still going to want to partner with alternative lenders in 2022.

“A big part of this has to do with the fact that banks cannot transform their business model from top to bottom overnight because of the regulatory environment they are operating in, but they also want to be able to offer the same kind of solutions and services non-traditional lenders provide.”

He adds: “Banks are going to do everything they can to find ways to fold alternative lending services into their lending menus as much as possible, all while looking for ways to work within their regulatory framework to reinvent and reimagine many of their legacy services.”

Alternative currencies in the form of crypto

Indeed, when all these aspects combine, they result in an industry that provides significantly more efficient and cost-effective loan disbursement, as well as better customer servicing.

According to Jaro Popowic, Chief Brand Lead at Mercuryo – a global payments infrastructure platform, providing businesses from both the fiat and crypto worlds with a wide range of financial services that are accessible through API integration – digital currencies will also play a major role in the future of alternative finance. 

“As prosaic as it may be, we are confident that cryptocurrencies will be one of the beneficiaries of the current instability despite being the hardest hit by this downturn,” says Popowic.

Popowic believes that many institutional players and payment networks see crypto as a long-term solution to cross-border transactions, looking at its technological potential rather than seeing it as a way for people to gamble.

“We are already seeing emerging economies such as Vietnam dominate global adoption. There, cryptocurrencies are used to send cross-border transactions and hedge against volatility. In fact, by providing the ability to manage digital money, more people get the opportunity to control, invest and store their funds.”

“Just think about it: ten years ago, people could hardly invest in the stock market. Today, everyone can invest from their phone – and many do; what the crypto industry is building today will be what helps democratise finance tomorrow.”