Alt Lending is all the lending that does NOT primarily go through the bank channel.
Banks have been pretty good at lending to consumers who have traditional full time jobs, to big corporations and to sovereigns/governments. That leaves everybody else to all the Fin, Tech, FinTech and TechFin companies who do Alt Lending. That is a big wide open market.
Lending is the beating heart of financial services. Alt Lending is a big wave of change. So I was delighted when Howard Tolman agreed to speak to me about how Alt Lending will change our world.
To understand Alt Lending you need to have a rare combination of experience. You need to be a banker who understands credit risk. You also need to be a technologist who understands how to use technology in new markets. You also need to be an entrepreneur with a mindset of creating value in broken markets.
Howard Tolman is that rare combination. You can read all about Howard on his LinkedIn profile.
I started off by asking Howard to tell us a bit about his background and how he got involved with Alt Lending
In the late 1980’s I had my own consultancy working with borrowers that needed expertise in getting the best deal out of a bank. For instance I helped raise £ 300 million for Equity and Law to help develop and fund its mortgage portfolio. I lost interest after the crash of 1991. Recently I have been working with Infrastructure projects with my old friend Mark Worrall. In the intervening years I moved into banking Technology.
Q2: What do you think is the biggest impact of Alt Lending to date?
Since 2008 mainstream banking has gradually withdrawn from the mainstream lending business. This is a result of ill thought through regulation, ultra low interest rates and QE. The gap has only partly been filled by new lenders, crowd funders, Junk bonds etc. Banks as they are presently configured do not have a future except as a tool for recycling money to bankrupt governments and large zombie companies which cannot afford to ever repay their debt.
Q3: What do you think has been holding back the wider adoption of Alt Lending?
This is a big subject. Lending is not a particularly difficult concept to get your head around but it does require you to do it well and understand the risks. Lending expertise has turned into a box ticking exercise when the underlying Risks are not understood. Banks have disintermediated themselves. It is OK for very large borrowers and Governments but projects which were easily financeable only twenty years ago are not doable now. There needs to be a wider mechanism for ordinary investors to lend to projects where the risk can be explained dynamically by experts in risk management. Exchanges are one conduit, tokens are another. Creating liquidity in these new markets is crucial.
Q4: What has been the single most critical innovation in the history of Alt Lending to date?
Probably the advent of crowd funding and peer to peer lending. Of course a lot of what could have been debt has now been replaced by equity but at a much higher cost. Lack of alternatives is harming business and innovation all over the place.
Q5: What is the one innovation currently lacking in Alt Lending that you would like to see?
The development and leveraging of small project infrastructure credits. There is consensus that incremental changes give the most bang for buck but most of these improvements are in the hands of local authorities who do not have the expertise to structure and raise finance without government support. In fact most of these institutions don’t even know how to manage assets properly. Blue sky thinking has gone out of the window. Assets such as a bypass or a bridge or a social housing estate have commercial value which should be exploited. There is simply not enough government support to go round.
Q6: In which sectors of the economy do you see Alt Lending having the biggest impact?
All sectors are relevant. Banks used to do this but they can’t do it at zero interest rates and restricted leverage. Since QE began money has been concentrated in fewer and fewer hands. In order to get a decent return investors and lenders need to learn to price risk properly. This means that understanding the risk is critical. That is why expertise must be bought to the party to articulate those risks to investors in words of one syllable. In addition their advice must be independent, reliable and dynamic. Liquidity is also necessary so that investors can change their minds. Technology has a huge role to play in this. People would be much more inclined to invest if they could trade assets on their mobile telephone.
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