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Consumers, businesses turn to alternative finance

Dec 08, 2012 Sean Albert

In the years following the Great Recession, alternative financial services have begun to represent a much higher market share, competing more successfully with traditional banking services than ever before. While consumers largely drove growth in the alternative finance sector in the past, now businesses are beginning to use similar sources of credit in higher numbers as a result of traditional banks not being able to meet demand. Financial institutions have dealt with a variety of adversity in the years following the recession, while alternative lenders have largely been able to be much more agile. This has shown in the performances of each industry, with traditional banking falling gradually in recent years and alternative financial services posting significant gains, such as within the short term lending and title loans sectors. Sentiments of consumers continue to shift
A recent study from Carlisle & Gallagher, a consulting firm based in Charlotte, North Carolina, found that 33 percent of responding consumers would prefer to take out loans from big box retailers like Wal-Mart if the option presented itself. According to the firm, 80 percent of the 618 respondents said that they would consider a mortgage from a non-traditional lender, such as retailers and payment processors. The study gave insight into why consumers are beginning to shift their preferences toward alternative lenders and away from banks, such as high interest rates, payments and taxes. Additionally, more than half of the respondents noted that slow turnover on loan applications is far too commonplace with traditional lenders, while alternative resources tend to be much more intuitive and rapid. Carlisle & Gallagher noted that nearly a third of respondents said that communicating with traditional banks is a source of frustration with traditional banking services, while 31 percent said that they could not track the status of their mortgage applications. Finally, a little more than a quarter of consumers explained that untrustworthy advice drove them away from traditional lenders. Small businesses follow suit
Last month, many reports indicated that financial institutions are rapidly falling out of the good graces of small business owners, and many of the reasons are similar to those cited by consumers in the Carlisle & Gallagher study. Alternative lending has stepped up and prevented many small businesses from falling behind the competition in the past year. As the speed with which alternative lenders can approve small business loans is usually quicker than banks, they remain a better fit than financial institutions in this sector because of the escalated need for available credit.