Balancing risk and reward in alternative finance

One of my recent posts considered the view that the fintech/alternative finance marketplace represents an evolution, not a revolution. A cynic might question the value of alternative finance in the first place, but the fact is this sector is making waves.

In the early stages of this new market some fintech businesses saw the banks’ traditional ways as creaky bureaucracy and attempted to do away with it in their own models. They adopted an ‘ask no questions’, or ‘ask a few questions and accept the answers at face value’, approach to lending in order to generate origination in larger volume. It was about quick decisions and getting on with it.

The problem with this approach, which some organisations are still adopting, is the high levels of risk attached. Some organisations will continue to push this approach and it wouldn’t be surprising to start to see failures where bad lending has caused defaults too significant to recover from.

This growing fear of defaults has lead smart organisations to recruit an increasing number of seasoned finance industry professionals. It’s brought an air of conservatism and maturity to the off-the-wall, baseball cap wearing innovators of fintech we saw just a few years ago.

This more traditional approach to risk is already restoring confidence and delivering transparency to the sector. Those organisations which are able to strike a balance between traditional risk processing and the innovative, flexible opportunities fintech delivers, will be the ones to prosper. The days of the low drag, high volume business model are numbered.

No one wants irresponsible lending which will increase exposure to risk and could fuel the next dip in the economic cycle into another crash. The new wave of alternative finance businesses are avoiding this, striving for transparency, consistency and flexibility to drive the market forward. This is what technology combined with fresh thinking can deliver.