Non-bank financial institutions have been active lenders to middle-market businesses and consumers for decades, often as lenders of last resort to borrowers in acute need. In recent years, however, NBFI lending has surged as individuals and small to midsize companies have come to view them as welcome alternatives to risk-averse and highly-regulated traditional banks.
To make the most of this opportunity as a lender — a chance amplified by the economic and social impacts of an ongoing pandemic of uncertain severity and duration — many NBFIs are looking to simplify approvals, streamline operations, and achieve scale with help from new lending technology.
NBFIs fill a market segment neglected by banks
The big shift to NBFC-based lenders — a wide category that includes investment banks, insurance companies, hedge funds, an array of lenders in the mortgage, peer-to-peer, payday and microfinance spaces, as well as retailers, utilities, and medical practices — occurred during and after the Financial Crisis of 2008.
With banks choking on unserviceable subprime-mortgage debt, and a substantially bailed-out financial sector forced into a series of shotgun mergers and higher capital-reserve requirements for lending, NBFIs quickly came into sharp relief for cash-strapped businesses. Meanwhile, near-zero interest rates — a result of unprecedented easing by central banks in the developed world — made traditional banks, themselves shell shocked by a barrage of bank failures, wary of lending to businesses. In turn, this low-rate environment made the higher rates NBFIs tend to charge appear more palatable than ever before.
In the year 2000, NBFIs accounted for less than $50 billion in financing worldwide, according to a Bloomberg report published just before the coronavirus pandemic. By 2019, the annual amount had jumped to nearly $800 billion. In the same pre-Covid report, Bloomberg predicts NBFI lending will approach the $1-trillion mark in 2020.
But the rise of NBFIs isn’t solely attributable to low rates and relatively decent terms — a backdrop in play now as much as it was in the last recession. To a large extent, the surge we’re seeing now is also linked to advances in technology, particularly artificial intelligence.
Artificial intelligence enables smarter lending
“Loan origination and underwriting powered by AI employs algorithms that get more accurate and efficient over time, a process likened to human learning,” says Dmitry Voronenko, CEO and Co-founder of banking-tech provider TurnKey Lender. “This task-processing capacity lets us combine traditional and alternative credit scoring and data sources so NBFIs can make more loans while minimizing risk, maximizing returns, and enhancing the overall health of loan portfolios.”
For example, a micro financier that works with businesses lacking access to conventional lenders needs a technology partner that can help it control credit risks, reduce human error — and make time-to-funding as short as possible.
The solution is end-to-end automation through the full life cycle of every loan across:
- Loan origination and underwriting based on alternative as well as traditional sources
- Loan servicing characterized by simplicity, interactivity, and intuitive approaches for smooth processing and monitoring
- Debt collection coupled with flexible notification settings and payment-provider integrations for automatic or on-demand collection
- Reporting and tracking for staff management, compliance, and internal business-process analytics
- Credit-risk management based on customizable scorecards for proprietary models derived from a blend of traditional and alternative borrower-evaluation techniques
Meanwhile, so-called payday lenders, which specialize in short-term consumer loans, use TurnKey Lender’s technology to overcome traditionally persistent defaults and delinquencies, drive speedier approvals, and improve conversion rates and lead generation.
Case studies in NBFI lending: Capitex and BetterFi
The following examples show advanced lending technology in action for two North American NBFIs.
- Canadian alternative lender Capitex Finance needed lending technology flexible enough to meet the company’s specific needs around credit scoring and sufficiently intuitive for borrowers — mainly with lower credit scores — to enjoy a smooth and positive experience. Capitex decided on TurnKey Lender for automated loan management across origination, underwriting, servicing, collection, reporting, oversight, and analytics.
“The team at Capitex impressed us from the very start,” says TurnKey Lender’s Voronenko. “They had extensive theoretical and practical understanding of credit criteria, and they knew exactly what they wanted from a technology partner — and of course were delighted to meet their specifications.”
You can check the case study we wrote about Capitex here.
- US-based BetterFi is a non-profit “economic justice” enterprise mandated to provide financial coaching and affordable loans to unbanked and underbanked consumers as an alternative to predatory lenders. With manual application processing eating into time better spent with customers, BetterFi wanted an automated cloud-based solution aligned with the nonprofit’s tight budget, small staff — and extra reporting criteria unique to charitable organizations.
Going with TurnKey Lender, BetterFi met those criteria and more — in a package that allowed for smooth operations with round-the-clock support to bolster limited in-house IT support. Here’s BetterFi’s success story:
Digitized lending for a post-COVID future
BetterFi and Capitex are among a number of NBFIs looking to do more than survive an economic downturn.
“These are forward-looking companies with smart and dynamic leaders,” says Vorenenko. “They’re consciously laying the groundwork for accelerated growth coming out of this crisis, whenever that may be.”
Meanwhile, even as they eye the next economic cycle, TurnKey Lender’s client firms “want to know the technology they’ve engaged enhances their businesses now and will continue to as new requirements and opportunities arise,” adds Vorenenko. “As a result, they’re on the hunt for technology partners that can help them achieve faster originations, scalability, security, ease of use, and 24/7 support.”
Reach out to the TurnKey Lender team today to learn more.