Private vs. Traditional Lenders: Navigating Similar Challenges with Technology

A development I’ve been following is the steady growth of private lenders as a viable, and sometimes preferable, alternative for commercial loans. Private lenders can provide loans more quickly and with more flexible terms than banks. They advertise their ability to make decisions and fund deals faster, which is appealing to some borrowers. Their ability to provide faster, more flexible, and more certain financing to a wider range of borrowers has made them an increasingly attractive alternative to traditional bank lending for many. Then there are the proposed increases in bank capital requirements by U.S. regulators that could make banks even more reluctant to make some business loans, further driving lending into the private credit market. So keeping an eye on private lenders in the news and keeping an ear to the talk in the industry itself, two things have become clear: 1. private lenders may be an attractive alternative, but they face the same challenges as traditional lenders and 2. if alternative lenders want to be successful in the commercial lending market, they need to find lasting servicing solutions to those challenges that will help them be competitive now while being able to react to oncoming changes.

Alternative Lenders, Similar Challenges

With current market volatility, there’s been an increased focus on private and alternative lenders, and the challenges they face. Recently, I came across an article in the Wall Street Journal (Future Problems for Private Lending Will Start Today) and another in Bloomberg (Why Private Credit Is Booming and Banks Are Fighting Back) that offered interesting insight into the challenges for this fast-growing sector. What struck me is that those challenges were so similar to the ones we’re hearing from our clients and other major banks—increased flexibility in offerings, increased competition, market volatility, borrower demand for fast decisioning and, regulatory demand for transparency are all hot buttons for both traditional and “alternative” lenders.

Taking a deeper look at the challenges, we see the increased competition is from banks re-entering the leveraged lending market, even as borrower demand for new loans has been tepid and credit quality pretty much across the board has been volatile, at best. Following the 2008 financial crisis, some banks pulled back from business lending due to heightened regulatory scrutiny. As banks pulled back, private credit stepped in, but now banks are venturing back, putting pressure on private credit pricing to be more flexible and loan structures to be even more agile.

Further concern comes from the potential of continuing deterioration in credit quality as the broadly syndicated loan and direct lending markets converge and lenders get more innovative with financings. The WSJ article I mentioned above pointed out that Moody's has warned of “competitive escalations” between the two markets of private and traditional lenders.

In the regulatory challenges column, traditional lenders may have a tiny leg up, as the opacity of private credit markets compared to public markets makes risks in the sector challenging to monitor and limits regulators' ability to react swiftly at times of financial stress. There are calls for more intrusive supervisory and regulatory approaches, as well as mandating more reporting by private credit funds.

Similar Challenges, Same Solutions

If the challenges are the same, it follows the underlying solutions should be also. There has been a “call to arms” over the past decade strongly urging, banks to upgrade their technology. We’ve heard (and said) it’s no longer “if” or even “when” but “now” when it comes to the question of transforming commercial lending systems to a digital, real-time platform with integration and automation capabilities. Which is what we offer our clients with AFSVision, and we’ve seen the difference having the tools a next-generation commercial lending platform can make.

Need to stay competitive?

Then you need to attract and keep customers with tailored solutions, fast response times, and personalized advice, which are now the bare minimum of what you are expected to deliver. And all that is only possible with a modern technology solution that offers real-time, reliable data to enable faster response times and better customer experience. AFSVision clients benefit from AFSVision’s automated process efficiencies and integration capabilities for real-time responses and proper data controls, allowing them to focus on their customers while generating targeted business.

Need to respond to more regulatory scrutiny?

Worried about being able to respond to continuous changes in the market? Once again, we’re back to adopting technology that can provide quick and easy access to real-time reporting on data you can trust. Without access to consistent, timely, and reliable data, no solution will deliver meaningful or sustainable value, or be able to respond quickly enough to increased regulatory demands and market fluctuations, no matter how new or innovative its technology. That’s why AFSVision focuses on data integrity, with an entire set of workflow tools and controls in our commercial lending system that define and promote accuracy in data.

Focused on growing your commercial lending portfolio as a private lender?

Then you need the agility to be able to adapt to market changes while you grow. An agile, real-time core loan administration system designed to adapt easily to client growth and market changes is the base line of what you should be looking for in a solution. Meeting market, and customer, demands means being able to make quicker loan decisions, produce new offerings quickly, stay ahead of market and regulatory changes, and keep pace with you as you grow. We consistently hear from our clients that a major factor in their decision to invest in AFSVision was the system’s flexibility and growth-forward design.

This isn’t anything I haven’t written about previously, but I felt it needed to be pointed out that, whether a traditional commercial lender (in the form of regional to global bank) or a private lender really doesn’t matter at the base. The challenges of commercial lending, itself, remain the same, and so does the solution. Focus on your core technology, or, as AFS CEO Rick Bare has said before, risk getting left behind.

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