2023 is proving to be a difficult year for non-bank lenders according to a new research by Codat. From a lack of venture capital funding to reduced demand, multiple factors are adding up to create a non-hospitable environment for these players.
Challenges
- Demand dips: 22% of non-bank lenders in the US and the UK report a reduction in demand for alternative lending products. While banks have access to cheaper capital due to deposits, alternative lenders rely on costlier forms of capital, which has become even more expensive and scarce this year. In an attempt to remain in the green, non-bank lenders have tried to pass on these costs to their customers, which has led to reduced demand for their products.
- Weak product-market fit: In more forgiving macroeconomic conditions, non-bank lenders could afford to target multiple consumer segments at once and test out new products and strategies. But trial and error product methodologies are no longer an option. 22% of US and UK lenders report that weak product-market fits are restricting growth. While some are making changes to their core products to address larger addressable markets, others are focusing on larger customers to improve profitability and growth.
- Incumbents are winning out: While bank loans may be harder to get, incumbents are also able to offer lower rates than alternative lenders. This is proving to be a differentiating factor in the current high-interest rate and high-inflation environment, with 19% of non-bank lenders reporting losing business to traditional banks.
- Investment scarcity: Global fintech funding has nearly halved this year. 19% of non-bank lenders report struggling to raise money due to investor sentiments and overall increase in the cost of capital. To counteract this, non-bank lenders are prioritizing profitability to avoid having to raise funds and 28% are thinking of selling or going public in the next 12 months.
Solutions: Adapt to survive
In order to survive these unfavorable conditions, non-bank lenders have had to reassess their business strategies to stay afloat. At least 64% of non-bank lenders in the US and the UK are focusing on improving efficiency through reducing costs of underwriting, consolidating loan products, as well as using data to reduce probability of defaults.
Non-bank lenders are also considering refocusing their products to target more established businesses. While 32% are thinking of underwriting businesses with longer trading histories, 38% of lenders in the US are considering targeting larger businesses.
If current macroeconomic conditions persist, it is likely that the distribution of customers across banks and alternative lenders is going to change. Although fintech lenders were known for their focus on SMBs and providing access to capital for new businesses, economic headwinds have forced the sector to make changes.
This may mean that new businesses may need to walk the well-trodden path to the bank to address their capital needs. But banks are not immune to current economic conditions and are undertaking measures of their own to reduce risk. Will this mean that new small businesses are going to be met with a lose-lose situation that stems growth in this sector?