In our prior installment, we discussed the transformative nature of technical innovation on the retail lending landscape. So, where is the money to fund all this innovation coming from? Whenever there is significant disruption like there is right now in the consumer lending and financing industry, the innovators must be paid. In this industry, there is the additional hurdle that the funds to be offered must be secured.
Today’s most innovative lenders and LTO financing companies are bypassing the traditional sources of corporate funds that underlie the underwriting strategies of long-standing incumbent lenders. Instead they are mining a variety of funds, from crowd-sourcing to highly refined Private Equity plays. These new sources, which became prominent in the first half of this decade, are proving surprisingly patient and resilient. Skeptics of the trend toward innovate sources of capital offer that established lenders have effectively used their low cost of funds to create more compelling products such as 6-month or 12-month no-interest loans. These traditionalists fail to realize that this is a paltry defense; while bank deposits and bond markets do offer a low cost of funds, new lenders are fighting back by finding similarly low-cost funding such regional banks and credit unions, and are using the risk-tolerance and innovation mindset of their capital partners to create products that are more innovative than many traditional lenders can tolerate.
One of LendPro’s many partners, West Creek Financial, is a good example. West Creek has obtained financing through a number of channels including private equity, family offices, and angel investors. I was recently speaking with Boomer Muth, their CEO, and he offered “You can find sources of capital from multiple channels as long as your products are compelling. If you have a track record of solid underwriting, then there are many capital investors with a hunger to get into debt financing in particular. For the past few years, capital has been pursuing innovative lenders, not the other way around.”
So these new lenders are not a transitory phenomenon. They are here to stay. Any incumbent thinking they can hold share by “walking backwards slowly”, as I recently heard one say, is kidding themselves. But while this new segment is now a permanent part of the landscape, there will be constant change within, as winners establish themselves over stragglers, and all change their products rapidly to test, innovate, and refine. The question is, as a retailer, do you have the ability to harness this energy? More on that next time.
