Banks may struggle with high cost structures, outdated technology and regulatory capital pressures that limit their ability to lend.
Under the traditional banking model, banks draw on debt and equity to augment customer savings deposits to make loans. Consumer credit decisions are often based on credit scores, backward-looking measures of consumer credit worthiness, which may be augmented with data such as income and employment status.
Using highly-automated models and expansive datasets, alternative lending platforms can rapidly underwrite borrower credit risk.
Borrowers may access credit in a more streamlined fashion as compared to the traditional lending process, often on terms more attractive than otherwise would be available.
Loan investors may access attractive credit risk premia historically captured by banks, while diversifying their portfolio fixed income and credit exposures.
With alternative lending, technology-enabled models rapidly underwrite borrower credit risk to determine appropriate loan pricing, terms and amounts. Through these platforms, loan investors, which are predominantly large institutions, provide capital for loans directly.
Platforms may use partner banks to formally originate the loans that they underwrite. The partner banks typically conduct oversight on the platforms’ underwriting models and ensure that underwritten loans and servicing procedures comply with applicable laws. In some cases, the partner banks or the platforms may maintain a continuing economic interest in loans sold to investors.
1 Diversification does not eliminate the risk of loss.
1 Diversification does not eliminate the risk of loss.
1 Diversification does not eliminate the risk of loss.