How banks in Asia can compete against the rise of alternative lenders

With their loan books growing at an estimated 175 per cent per year, online lenders are changing the face of the global banking industry at an unprecedented pace. One recent survey found that three-quarters of credit analysts consider alternative lenders to be a great threat to banks. These concerns appear to be well grounded: research by McKinsey has found that between 20 and 60 per cent of banks’ profits are at risk due to falling margins as they lose market share to competitors.

There is a common perception that Asian banks, which are typically performing more strongly than their peers in the West, are as a result much better protected against the threat of competition. But that is a short-sighted and overly-complacent view. All over the world, the next generation of businesses are shedding traditional inhibitions and fearlessly embracing the mobile revolution. And bypassing big, intrusive banks.

What’s more, Asian banks have to date not been the best at lending to small and medium enterprises. A major reason for this is that the big lenders issue predominantly collateralized loans, but young businesses are often reliant on their intellectual property rather than the tangible assets being demanded.

In this environment the appeal of online lenders is compelling. Emerging online lenders are driving innovation in the sector in the same way that other online players such as Amazon have transformed the retail sector and Market Invoice has disrupted the invoice financing sector. According to a recent report by Grant Thornton, this means that some 60 per cent of mid-market businesses already source financing from alternative lenders.

Online lenders’ services are typically faster, cheaper and more transparent than the traditional offering. The biggest online lending players offer online and mobile applications, which can be completed in under 30 minutes compared to the 25 hours on average a small business spends filling out paperwork on a traditional loan. Alternative lenders also typically make decisions based on predictive modelling and data aggregation rather than focusing on a business owner’s personal credit history and industry-specific trends and employee numbers.

But banks can fight back – if they embrace technology and use it smartly. Nearly all of the online lenders swamp potential borrowers with a strikingly similar variety of direct mail, email, and online advertisements. The sheer volume of this material is almost overwhelming for some businesses and increasingly irritating for others and banks can fight back by taking a more sophisticated approach, combining technology with more effective marketing to win back businesses.

One way to do this is for banks to step up their engagement online, on social media and developing mobile apps with user-friendly interfaces – ultimately, by getting more interactive. Banks can no longer shy away from these channels as they have in the past for compliance reasons. They are increasingly seen as a vital channel to win customers.

Banks also have a huge advantage over younger competitors in terms of their enhanced security, at a time when cybercrime has emerged as one of the most serious risks to the global financial services industry. Banks are still of course vulnerable to breaches, but are collaborating to adopt blockchain technology, a new fabric for payments transfer and financial markets which is potentially immune to manipulation by cybercriminals.

Some Asian banks have already began embracing technology to expand their offering. For example, DBS bank and Maybank, both headquartered in Singapore, have rolled out their own P2P services, one channelled through mobile phone numbers, the other through debit and credit cards. Realizing that cannot afford to miss out on the opportunity: the global P2P platform expected to reach $350 billion by 2025.

Online lenders are also becoming increasingly commoditised, have a similar cost of capital, and charge roughly the same rates, have nearly identical customer acquisition costs and this endemic lack of difference is beginning to degrade customer experiences. Banks have an advantage in their experience in terms of building client relationships as businesses are not in the market 24/7 for capital and are better at finding ways to expand their product ranges to include advisory services and other long-tail engagement tools. 

Where it makes sense, banks can also collaborate rather than compete with online lenders. For example, JP Morgan Chase has tapped OnDeck Capital to create an online small business loan for its customers. J.P. Morgan will integrate OnDeck’s technology into its checking-account website in order to offer loans to pre-screened borrowers.

All the above shows that despite the threat that online lenders pose, if banks rise to the challenge, capitalise on their historic advantages, embrace a savvier use of technology and collaborate with their online lending peers, the battle for supremacy in the small business market is far from over.