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Digital platforms offer a new way to borrow money

In case you hadn’t noticed, you no longer need a bank to get funding for your business or personal use. Now you can go online for all your financial needs, including borrowing from a number of different sources — or putting your own personal capital to use to take advantage of attractive returns.

The alternative finance market is less than a decade old, but the explosive growth is remarkable. Last year, more than $36 billion was generated by these digital platforms, up 212 percent from 2014.

Most importantly, it’s changing the way people, businesses, and institutions access and invest money. Many consumers—raised on ATMs, credit and debit cards and online money transfers— are embracing the speed, convenience and transparency offered by these platforms.

Two of the most popular financing methods are crowd-funding, where money is raised from a number of different sources, and peer-to-peer (P2P) lending, where borrowers and lenders are matched online by third-party websites. Online direct lending is also popular, focusing on enhancing the customer experience and redefining credit worthiness using big data.

Adopting advanced technology to solve for traditional frustrations in lending has resulted in various benefits, including:

  • Speed: The use of algorithmic technology enables credit decisions and underwriting to happen in minutes instead of days or months.
  • Transparency: Investors and borrowers can easily examine loan portfolios, including risks and rewards.
  • Customer focus: New platforms bring the “brick and mortar” branch into the on-demand/mobile generation.
  • Data: Access to greater data has re-engineered the definition of credit- worthiness opening credit options for a number of underserved markets.

Between 2013 and 2015, online alternative finance platforms in the U.S. facilitated more than $10.81 billion for growth, expansion, working and venture capital to 268,524 small and medium enterprises (SMEs).

The real estate industry is also taking advantage of the platforms. Last year alone, alternative lending generated just over $1.26 billion in real estate financing in the U.S.

Alternative financing is still a small part of the overall financial market, but it clearly has gotten the attention of traditional institutions. Many are now making their own forays into online financing by investing in the technology and forming strategic partnerships.

Institutional investors—including mutual funds, pension funds, hedge funds and traditional banks—now provide the majority of business loans and consumer loans on alternative finance platforms.

Online platforms, meanwhile, are courting additional retail investors to diversify their funding base. Some, for instance, are making it easier for online financial advisors to offer their loans, and changing securities regulations are opening the market to more retail investment.

Online alternative finance continues to break new ground with market growth, product innovation, technological advancement, corporate partnerships, international expansion and regulatory recognition.

The market’s appetite for innovation is expected to accelerate the pace of disruption. The trends in online alternative financing have the potential to reshape the landscape of the entire financial services industry. Banks must now rise up to meet these changes.

The article first appeared here

Read on Payment Developments in Africa, Volume 2

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