Alt Lending: American Banks as agents of Social Change?
Why this matters: It is generally accepted that the American banking system entered the COVID crisis in somewhat better shape than its European counterparts but then along came the brutal death of George Floyd and the continual turbulence that that has caused worldwide but mostly in the United States. A whole team of people at the American Banker magazine argue that as a result of this confluence things will never be the same again both from the point of view of product delivery and regulatory changes. The first part of this premise is that there was a surge in digital banking use during the early days of the pandemic the scale of which was unprecedented and was exacerbating the already accelerating trend toward digital delivery particularly among the major players such as JPM, BofA, Wells Fargo etc. This was hardly surprising given the nature of the disease and the reluctance of people to risk contagion. This coupled with the trend away from physical branch banking has led to a 200% rise in mobile bank registrations, an 85% increase in mobile transactions and a 45% plus increase in boomers using digital applications all in a two month period. As I say it is hard not to buy in to this scenario, The same article also argues that somehow or other both regulators and banks will need to show their soft side in terms of debt forgiveness, foreclosures etc as people of colour have been disproportionately affected. Given the amount of QE the FED has indulged in it is arguably the largest cause of wealth transfer from poor to rich yet nobody is going to do anything about that. Virtue signalling is not the business of either bankers or regulators. Alt lending has a role here in keeping the flow of funding going. Their business is to make money not be an arm of social services.
Why this matters: Last week I mentioned Oak North’s Credit Science platform and this week they announce that they have hired a silicon valley analytics guru Raj Cherabuddi to spearhead the second generation of the platform. I would not be at all surprised if the Credit Science platform quite quickly became more valuable than the banking operation itself. Certainly there has been a move towards purely technical analysis of historical data and future hypothesis becoming more important than somewhat more traditional methods in assessing credit risk. This by the way is not a new phenomenom and is in a whole variety of ways a lot better than the guesswork and archaic systems which used to be used in the not too distant past. While at an OVUM meeting in London a couple of years ago I had a chat with an analyst concerning how these applications were built and how much original knowledge had been lost and replaced by IT. OVUm considered it a threat to stability. Real knowledge of what the underlying app is trying to achieve requires knowledge of the business as well as the management of the data. I hope that Oak North are bearing this in mind.
Why this matters. A Friend told me last week that the Mittelstand, the economic powerhouse of modern Germany comprising many thousands of quite large frequently family owned companies in strategic industries and with irreplaceable knowledge is causing real concern among bankers in Frankfurt. This seems to be partly caused by the inability of German banks to provide the necessary finance to this sector due to COVID. It is widely recognised that the European banking sector is in chronic disarray and has been since the 2008 crisis yet the key issue of non performing loans continues to haunt the industry as does the relationship between banking liabilities and sovereign debt. The key advantage that Alt lenders have at the moment is that they have little baggage to carry. Unless of course they load themselves up with it in a bid to outdo the big boys. The jobs situation all over Europe including the Eurozone is appalling and can only lead to falling asset values and a growing inability of borrowers to service debt. At some time we are all going to have to face up to this.
Howard Tolman is a well-known banker, technologist and entrepreneur in London,
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For context on Alt Lending please read the Interview with Howard Tolman about the future of Alt Lending and read articles tagged Alt Lending in our archives.
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