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New funders not without risks

Alternative lenders ‘pose threat to traditional banks’

MoneyAlternative lending is expected to significantly shake up the banking market, according to the world’s leading credit experts.

They believe the growth of providers such as Zopa and other peer-to-peer newcomers will pose a real threat to traditional lenders.

In a survey of 200 delegates from 40 countries attending a conference in Edinburgh, three quarters (75%) said there were a threat to established sources of funding, with 19% believing them to be a “big threat”.

More than half (55%) felt they will make the market more competitive, while 53% believed alternative lending models are likely to increase access to finance in the next five years.

While generally supportive of the trend, the experts attending Edinburgh Business School’s biennial Credit Risk and Credit Scoring Conference, cautioned that the new lenders’ models are not without potential risks.

Almost three-quarters (73%) thought there are dangers in the methods the new crop of alternative lenders are using to decide who to lend to and how much to lend.

About a quarter (26%) said alternative lenders are relaxing controls on lending too much, and the same proportion felt these companies could be circumventing regulations in order to operate. One in five of those questioned (20%) thought the newer lenders may be more open to fraud.

The experts were broadly optimistic about the impact of the new breed of challenger brands for consumers and small businesses, with nearly half (48%) believing credit will become more available in the country they live in during the next six months.

However, nearly three quarters of respondents (73%) believe financial stability can be improved by keeping lending criteria as they are, or tightening controls.

Jonathan Crook, Director of the Credit Research Centre at the University of Edinburgh Business School, said: “The strong growth of alternative lenders over recent years shows no signs of abating, and the view of our expert delegation was that traditional banks need to adapt to keep up with this new, nimble market – and fast.

“In a market where a small difference to an interest rate can make all the difference in attracting a good customer’s business, banks that don’t push ahead with technological advancements in the way that newer challengers are could really begin to suffer.”

“It’s all good news for consumers and small businesses who may be looking for loans, and is actually positive for the market overall – greater competition will encourage innovation in areas such as personalising interest rates for customers.”

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