04/25/2016 06:24 EDT | Updated 04/26/2017 05:12 EDT

The One Reason Banks Should Learn To Love Alternative Lenders

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Hand holding a roll of green bank notes against wooden table

The Canadian fintech space has never been more exciting. From mobile wallets and online banking, to robo-advisors and peer-to-peer lending; startup after startup, we're finally catching up to what has been business as usual in the States, and while it's taken a little longer to catch on here in Canada, there's little doubt fintech is already having a huge impact on Canadian banking.

So why would big banks be interested in partnering with alternative lenders, and courting these underbanked borrowers? Simple: customer loyalty. Through their partnerships with alternative lenders, larger banks can now bring these underbanked customers into their fold earlier, whilst letting the alternative lenders step in and help these customers grow. When the small borrower eventually outgrows the structure and scale of their alternative lender, the big bank can then step in and usher that previously underbanked borrower to the next level of banking service, keeping the customer under the same roof and helping them grow even bigger.

Fintech startups offer a lot of appeal to small businesses and first-time borrowers, those whose credit profile would normally have them shy away, or be turned away, from banks or credit unions. In the past, underbanked customers with low credit scores couldn't get any loan at all, even if business was booming or they were set to grow, signalling a nail in the coffin.

But alternative lenders have stepped in and filled this niche. Using algorithms that look at a wide set of data points to evaluate a prospective borrower, alternative lenders can make informed assessments of a borrower's credit risk.

This approach is still fairly new, and as alternative lenders continue to increase their pool of usable customer data, which can include unconventional things like reviews on social media - in conjunction with other, more traditional credit metrics - these lenders will in turn be able to further refine their risk models. The goal of this continual refinement is to ultimately lower the cost of capital for prospective borrowers as well as make the process more convenient.

Meanwhile, for these underbanked borrowers, the three most attractive features of alternative lenders are:

  • Accessibility: they can actually get a loan!
  • Speed in which their business loan can be accessed.
  • Convenience; not having to leave the comfort of one's computer or smartphone, and the smooth user experience of online applications.

One of the most compelling effects of this new banking evolution has been how quickly some traditional banks, recognizing the influence of fintech, have partnered with these innovative alternative lenders. And as traditional big banks begin to forge these partnerships, the gap between big banks and alternative financial players is narrowing, and a new ecosystem of Canadian banking is being created.

Conventional wisdom tells us that any new or revolutionary way of doing things is automatically "disruptive" and threatening to the established industry players. But with the emergence of alternative lenders, big banks are wise to see them not as "disruptors", but as true partners, who are helping deliver banking services to a previously underbanked, underserved customer.

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