How the economic downturn will impact alternative finance

Prakash Pattni is the MD for Financial Services Digital Transformation, IBM. He is an expert in cloud technology, organisational transformation, agile methods, and more. He has almost 20 years of experience in the technology industry, and has worked within investment banking and commodities for the majority of his career. We caught up with him to find out his thoughts on how the global economic situation will affect the alternative finance space. 

What effect is the current economic climate having on the alternative finance space?

“Economic turmoil is causing an increase in interest rates across the board, making sources of alternative finance less competitive against traditional lenders. While companies are looking for new sources of funding, the criteria will become more stringent for both traditional and alternative finance lenders.

“Funding will be available, but it will be more carefully assessed, and companies will need to ensure they can meet the funding criteria – and it will be companies with strong business plans that succeed in securing funding.

“There will also be more scrutiny of investment decisions and ability to cope as we move away from a period of low interest rates.  This may result in an acceleration of the natural selection of companies as the strong will rise and the weak will fall faster than when rates were lower and the economy more stable.

What new and major trends will be emerging as a result of the unstable economy?

“In the same way that the pandemic accelerated digitalisation, the current economic challenges will accelerate the move to more sustainable sources and better understanding and optimisation of energy usage. And we now are seeing an acceleration of ESG-related initiatives that help to tackle energy costs.

“Equally, automation will increasingly emerge as a method of fighting rising costs. For example, the alternative finance space can expect to see an increase in the use of Artificial Intelligence (AI) to assess risk and aid investment decisions.

“In turn, this must be balanced with explainable AI to ensure these decisions are made fairly. We have seen issues where AI has made discriminatory decisions be that around gender or race, so expect this space to accelerate as well as AI put to increase usage.

Which alternative finance sectors have been most affected by recent events?

“All alternative finance platforms, including crowdfunding, peer-to-peer, and venture capital, have been impacted by recent economic challenges. It’s difficult to say if one has been impacted more so than another, although consumer-driven alternative finance will likely react sooner than more institutional forms of finance”.