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In focus: Alternative financing, credit's global spread

Apr 30, 2015 Sean Albert

Since the Great Recession, the financial sector's many arms have begun to evolve due to necessity, and the United States has already seen a major increase in the use of alternative financing and credit scoring as a result. Now, because of successful applications of these utilities throughout the nation, programs are expanding and other regions of the globe are getting on board with the alternative financial services arena, helping consumers, businesses and others recover from what was a devastating few years for the global economy.

Simple catalysts such as the realization that traditional credit scoring might not always reveal the most helpful and relevant information for businesses and financial institutions, as well as more complex demands including those for more speedy completion of these reports, are driving the popularity of these services across the board. On the financing end, one could make the argument that alternative lending programs were some of the main reasons why many competitors in the small business sector survived the harshest years of the recession.

At the end of the day, it has become clear that more entities are seeking out alternative financial services, including lending programs, credit scoring and financing acquisition, and it has yet to be seen how much more these industries can grow on the global stage. However, two new reports indicated that both Europe and the United States are seeing increases in alternative credit scoring and distribution for relatively niche markets.

Burgeoning in Europe
The National Law Review recently published an article on the the increased prevalence of alternative credit markets in Europe, citing efforts from officials and governments throughout the continent to stimulate growth following the recession back in 2008. According to the news provider, this was really a needs-based trend from the beginning, but certain obstacles have yet to be overcome by alternative credit players that are not attached to corporate entities or traditional financial institutions.

For example, the source pointed out that the U.S. debt model is far more amicable to new, independent alternative credit providers and scorers than the systems in Europe, which has made it difficult for the industry to really gain quality traction from the ground level up. However, because traditional banks have not been able to keep up with demand for financing among small and medium-sized businesses, the proverbial levy has started to break.

The National Law Review argued that the debt market has been revitalized and boosted thanks to alternative credit providers, but there is still much work to be done by way of legislation to allow the industry to flourish.

Scoring high in US
USA Today reported that startup companies in the United States are becoming more interested in alternative credit scoring as the years go on, but tend to only use them when trying to acquire financing through non-traditional channels. Whether or not alternative credit scoring becomes a reality among the nation's financial institutions, including major banks and credit unions, is still unclear, but the applications of the methods are largely unchecked.

For example, the source spoke to PricewaterhouseCoopers consumer finance practice principal Martin Touhey about the reasons behind alternative credit scoring's potential rise to popularity.

"There's a lot of people out there who are good credit risk, but because they've never been able to get credit, they fall out of the traditional model," Touhey told the news provider. "Is it time for consumer lending to go social?"

At the end of the day, the lending and credit scoring markets will likely need to be overhauled to make way for the modern era of business competition and need, and alternative channels will likely be a boon in this regard.