Hand In Hand: Are Strategic Partnerships The Future Of Fintech Lending?

Many businesses, especially in their early or high-growth stages, can find it hard to secure funding from traditional sources like banks and venture capital firms. Risk aversion, regulatory restraints, and the decline of small and community banks have made the traditional lending approach—walking into a bank with a solid business plan—all but obsolete.

Anybody who needs a mortgage knows they can go to companies like JP Morgan, Wells Fargo, or Bank of America. But if you need an alternative line of credit for your small to medium-sized business, where do you go? 

Businesses need funding, and for any financial institution, the worst thing is to say no to their clients. Luckily, there is an alternative: strategic partnerships between lenders. No single financial institution offers every available product to every customer; everyone has a comfort zone with regard to exposure to specific kinds of clients. If lending partners can direct overflow clients to each other, the benefits can extend in both directions.

Customized Solutions

Strategic partnerships are relatively new across the fintech industry. The lingering perception among some financial institutions—that alternative lenders compete with banks or credit unions—isn’t really the case. Alternative lenders offer a very different set of products that are tailored to different needs and opportunities, and many banks have come around to realize that a collaborative environment that expands lending options can be much better across the board.

Collaboration can help clients access capital, which is especially important in the already underserved SMB community. Lenders can make money while expanding the diversity of financial products they offer, providing a more catered option to their clientele.

The alternative lending space caters to high-growth companies, which inherently carry more risk. A cost-benefit analysis can show how much financial sense it makes in those situations, by providing funding that permits growth steps that weren’t possible because of a lack of capital. Once these companies stabilize, they’re often able to get longer-term permanent capital for their businesses from traditional lenders.

Challenges In Alternative Lending

Traditional lenders tend to have lower exposure thresholds, while fintech companies may be more willing to experiment with new lending models and technologies. To make the strategic partnership approach work, it’s important to find a way to align risk appetites and to balance innovation with risk management.

Fintech companies and traditional lenders tend to have different technology systems, and integrating those to ensure seamless data sharing and solid cybersecurity can be complex. Traditional lenders may be committed to entrenched legacy systems. We find those situations aren’t that common, though, and can be solved with enough management and stakeholder buy-in.

Lending is a heavily regulated industry, with rules and requirements that vary widely across different jurisdictions. Lender partnerships still have to secure all the necessary licenses, approvals, and maintain compliance. To streamline the process, paying banks a commission can help align incentives, and obtaining client consent for data sharing can make the exchange of information more efficient.

The main hurdle in the alternative lending space is simply brand awareness. Many investment banks, mergers and acquisition companies, and private equity firms don’t know about the different products that are available from alternative lenders. Building those relationships will encourage traditional lenders to be more open to these mutually beneficial partnerships.

Advice For Customers

Companies that are interested in exploring alternative financing should emphasize transparency and due diligence. Make sure that you understand the product you're onboarding, including all terms and associated costs. Is everything being disclosed? Is the contract transparent, with no hidden costs or fees?

The alternative lending space is still relatively unregulated, and there are many companies that will take advantage of merchants. More regulation will be crucial going forward, specifically on the issues of transparency and collection procedures to protect merchants.

Strategic lending partnerships between fintech innovators and traditional lenders, while in some ways still a work in progress, are a new and innovative path for business financing. As we watch brand awareness grow and incentives align, the relationship between new and old lending models promises to reshape how companies secure funding in the future.