Will alternative lending go mainstream in 2019?

If 2018 was an eventful year of rapid growth in the financial technology space, just wait until you see what 2019 has in store for the industry.

“We predict that the booming alternative lending industry, along with the fall-out from the banking royal commission and falling property prices, will dramatically transform the future of small business finance and the opportunities for brokers to future-proof their business and diversify into this booming area,” Spotcap AU/NZ managing director Lachlan Heussler said in a prediction piece.

“As a result of current market trends, we will also see business owners become more empowered and educated about their funding options as different lenders service their needs and go where the banks don't want to.”

Not so alternative anymore
According to Heussler, the word “alternative” may lead people to believe that online lending is just a small portion of Australia’s total loan market, but with the sector’s record-breaking growth likely to continue in 2019, alternative lending will soon become the go-to option for business owners in the future.

“Not long ago, there were only a few players in the online lending space in Australia. Fast forward only a few years, those same players have grown immensely and have updated their offering to cater to the needs of industry-specific clients,” he said.

KPMG’s 2018 Asia Pacific Alternative Finance Industry Report revealed that Australia, next to China, is the largest alternative finance market in Asia Pacific, valued at over $1.14bn in 2017. Its massive growth happened in 2018 and is predicted to continue in the following year as small business owners are increasingly turning to fintech lending for quick and accessible finance. 

Secured funding is moving out
As property prices decline at a rapid rate, small business owners are finding it increasingly difficult to use their home as a loan security. CoreLogic’s Home Value Index in November revealed that property prices in Australia experienced their largest annual fall since the 2009 GFC.

“With less equity to secure a business loan against, SMEs are turning to other forms of funding, including unsecured online business loans,” Heussler said. “Owners are often reluctant to place real-estate as collateral, so options that instead assess real-time business performance for loan approval will be a big area of growth.”

Diversification grows
The demand for home loans at brokerages across the country has been decreasing as the property market slows down. According to Heussler, more residential brokers will likely look for new avenues to boost revenues and future-proof their businesses in 2019, and “a growing area of opportunity for diversification is found in the online SME lending space”. In the last two years alone, the number of brokers offering both residential and commercial loans more than doubled.

“For brokers, alternative finance provides simple and speedy turnarounds, a way to grow their client base and the potential of a new revenue stream,” he added.

Transparency is a priority
In the wake of the royal commission, consumer demand for transparency from their financial providers has grown more than ever before. Financial institutions that fail to uphold disclosure standards are now at risk of losing many business owners over to alternative lenders. In the coming years, lenders need to be upfront about rates, fees, and commissions. Financial providers have already begun making efforts to improve transparency, particularly in the unsecured SME loan sector.

“In July, Spotcap and a group of leading Australian fintech companies signed a code of conduct, outlining practical principles that will standardise disclosure practices, coming into effect in January 2019,” Heussler said.

“Throughout 2019, transparency will become a priority and we will likely see many more businesses undertaking measures to improve consumer trust. These steps will make accessing finance a lot easier for consumers, as they can clearly determine what product is right for them and at what cost.”