Fintech innovation and the alternative economy area

Define alternative financing

Alternative finance is a general term that refers to all types of financial services that are administered outside the framework of the traditional banking system. These services are powered by fintech and are part of a rapidly growing network of service providers connected to the digital ecosystem.

Fintechs use 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 financing become so popular?

In a nutshell? Innovation and lower cost services.

Traditional banking services have not been able to meet the demands of the market for better alternatives for financial services. The incumbents have often proven 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 close 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 will only 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 up the drawbridge, having access to funding via alternative means will be critical”. He also believes that the alternative financial market has the ability to move much faster and with a more streamlined approach than traditional established players.

Non-bank loans are becoming more attractive to customers

Melba Montague, Senior VP of Banking and Capital Markets for Genpact, agrees, predicting that as the global economic downturn continues, customers will increasingly choose alternative financing solutions. “With rising inflation and the cost of living, the current economic climate is expected to worsen over the coming months. As cash and disposable income become tighter, we will see more and more people using non-bank loans as a means of alternative financing, with BNPL- models who are expected to have a prominent role.”

But, she points out, the BNPL industry is unregulated, decentralized and brings risks to consumers who borrow beyond their means without adequate financial advice.

She continues: “BNPL has undoubtedly made it easier to create debt, and that must be dealt with as more structured regulatory models are developed. As such, it is imperative that banks educate the consumer to avoid exacerbating an already fragile cost of living crisis.”

Other lending services will also see an increase in demand.

Mortgages are a good example because alternative mortgage lenders have different lending criteria than large banks, and can therefore be a way of approving loans when customers do not 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 of fintechs like Liberis suggests, alternative finance – and lending in particular – is an evolving area. It is a booming industry that has become an important part of financing SMEs, especially in the wake of digital transformation and on the back of the pandemic.

Peer-to-peer lending is also skyrocketing as it expands its services to include lending opportunities for businesses as well as consumer loans. This is going to increase further due to better regulations that build more trust in the sector.

New technologies such as AI and ML are also driving success. They allow automation and have greatly improved risk analysis, allowing them to confidently move forward and scale.

Alternative loan 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 for alternative lending packages will emerge. In short, this will consist of small ticket loans to be sold in packages with other services and bought by large lenders as a means of reducing risk.

Investors interested in alternative financing

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 to keep the lights on across global commerce, and providers who can facilitate such services with speed, efficiency and lower costs will continue to thrive – and therefore gain interest in the investment space.

We will see more fintech partnerships emerge

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

In his recent article for Forbes, Chad Otar, president of Lending Valley, Inc., explains, “Legacy banks and traditional lenders that are not interested in buying alternative finance companies outright will still want to partner with alternative lenders in 2022.

“A large part of this has to do with the fact that banks cannot transform their business model from top to bottom overnight due to the regulatory environment in which they operate, 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, while also 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

When all these aspects are combined, they result in an industry that provides significantly more efficient and cost-effective loan repayment, as well as better customer service.

According to Jaro Popowic, Chief Brand Lead at Mercuryo – a global payment infrastructure platform that provides businesses from both the fiat and crypto worlds with a wide range of financial services 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 volatility 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 already see emerging economies like Vietnam dominating global adoption. There, cryptocurrencies are used to send transactions across borders and hedge against volatility. In fact, by providing the ability to manage digital money, more people are empowered to control, invest and store their money.”

“Just think about it: Ten years ago, people could barely invest in the stock market. Today, anyone can invest from their phone – and many do; what the crypto industry builds today will be what helps democratize finance tomorrow.”