Three Alternative Business Models for Alternative Lenders

Fintech lenders have enjoyed explosive growth over the last decade. These tech-first funders have pioneered sophisticated underwriting mechanisms to offer credit efficiently to traditionally underserved borrowers. Non-bank brands like Borrowell and Thinking Capital have become household names for Canadians.

But with success comes competition. Consolidation, international entrants, and more consolidation has made the alternative lending landscape highly competitive. Even the country’s most conservative FIs have begun wadding into high risk credit by launching new speciality finance divisions. 

The once underserved high risk borrower now has a tremendous amount of credit options from capable fintech lenders all competing for their business. So where does that leave the lender?

Fintech lenders are quickly adapting their business models and exploring new avenues for capturing borrowers. I see three broad trends to this effect. 

Expanding the offering

As a customer is underwritten, the data they share with alternative lenders can be leveraged for any number of supplemental financial products. If a borrower qualifies for an installment loan, why not then also receive offers for a line of credit, a title loan and down the road even a mortgage. It benefits a consumer to access multiple products through a single application. This has been the game of big banks for the last 70 years.

Alternative lenders that have fought hard to capture the hearts and minds of digital borrowers, are interested in playing the same game. SoFi has expanded its service offering from student loan refinancing to insurance, deposit accounts, mortgages, and now even credit cards. 

On the flip side of the consumer balance sheet are Wealthsimple and KOHO, who have developed huge userbases across Canada and will now be launching credit products. 

Canadian fintech brands like Borrowell and BFS Capital are taking this a step further with predictive credit products. Borrowell Boost uses sophisticated data analysis to identify how much credit a consumer requires to avoid going into overdraft. BFS's soon-to-be-launching Float Simple makes a similar calculation for merchant float requirements. Both firms then proactively offer borrowers these incredibly specific amounts of credit without the borrower ever needing to raise their hand to ask. 

Young fintechs have already learned that there is huge value in growing with the borrower. As a debtor matures, so do their credit needs. Savvy lenders who know their customers are there with the perfect offering at the perfect time.

Indirect businesses

Sure, it’s easy to say that you are going to launch a new credit product, but for most brands outside of a handful of VC-fueled fintech darlings, this is unrealistic. Apt alternative lenders have had much more success expanding their customer base through partnerships with other lenders in the marketplace.

We see this primarily with large lenders who partner with indirectly competitive firms in order to get access to new clients and cross sell existing ones with new financial products. The best example of this is goeasy, Canada’s largest non-bank consumer lender. Goeasy has partnered with numerous fintechs that offer non-competitive services to their target demographic. Goeasy now offers their clients credit builder loans through Refresh Financial, small business loans through Merchant Growth, auto loans through Canada Drives, and provides instant sub-prime financing for the buy-now-pay-later firm PayBright.

Goeasy even took an equity position in PayBright last year to guarantee this partnership and take a stake in the rapidly expanding POS financing market.

Consumer lender Magical Credit similarly partnered with Marble Financial to offer a credit building program to borrower's entering consumer proposal. This partnership allows Magical Credit to drive business from an applicant it would otherwise have had to reject.

Indirect business divisions give lenders the ability to widen their net, and make revenues off of financial products that they don’t need to operate or own.

Banking as a service

Increasingly, lenders unpinned by strong technology stacks are spinning out pieces of their platform and repackaging them for license to other lenders. 

Lendified, a major Canadian SME fintech lender licenses out their credit underwriting platform, which operates under the subsidiary JUDI.AI to lenders across Canada. Similarly, OnDeck offers the ODX platform to help tech-laggards digitize their back office operations, as does Kabbage with their whitelabelled Kabbage Platform.

In several instances these spinoff services have become even more successful than their traditional financing business. Inverite Verification, a consumer financial data aggregator started as an open banking tool within Westrock Financial. Now Inverite Verification services hundreds of Westrock Financial’s rivals across Canada.

Canada's alternative lending ecosystem has evolved substantially bringing with it stronger service offerings to businesses and consumers.

For lenders this means introducing innovative alternative business models that can:

1. Better service their existing customers with new credit products as the borrower matures.
2. Expand their client base through industry partnerships instead of juicing marketing budgets and sending CAC through the roof.
3. Leverage their proprietary technology to service their competitors.

For more insights into Canadian lending attend the Canadian Lenders Summit - the largest event for lending & fintech in Canada.