Coming into 2022, the private lending industry and major financial institutions were particularly stable. Some even claimed the purported bull market would bolster private financial services throughout the year.
However, as the economy began to compensate in the wake of the pandemic and Russia’s invasion of Ukraine, many private lenders found themselves struggling to determine mutually beneficial interest rates from falling credit scores and spotty employment histories.
Usually, private lenders pick up the slack when modern financial institutions become unfavorable to borrowers. However, 2022 also saw private lenders struggling to prioritize encouraging repayments on existing loans and attracting new customers with favorable rates.
2023 looks set to be another challenging year for private lenders, but the choppy waters ahead can be sailed expertly as long as you know what to expect. Here’s what you need to know about what 2023 holds in store for the private lending industry, according to financial and lending experts.
Lending
Mortgages
When it comes to lending for real estate, the consensus is that mortgage rates will begin a slow decline as we go into 2023. Larger financial institutions will see interest rates on fixed-term mortgages finally dip below 6%. However, some experts are cautious about how this will affect the market as a whole.
“There are increasing signs that lenders are now starting to compete harder, and consequently fixed rates are beginning to fall,” said David Hollingsworth of L&C Brokers. “With swap rates down and a quieter market, we could soon find ourselves in the midst of a price war as lenders look to attract borrowers who are eager to pin down their biggest outgoing and defend against the higher cost of living.”
This could spell both advantages and disadvantages for the private lending industry. While private lending rates, on average, tend to be higher than large financial institutions, the benefits of private lending coupled with falling rates, on the whole, may just be enough to attract new borrowers. However, you can count on the fact that banks and brokers will be just as willing to market new rates, dragging private lenders straight into this prophesied price war.
Personal Loans
Again, 2023 will see private lenders needing to choose between marketing favorable rates, a lack of requirements for borrowers, and the livelihood and continued growth of their lending service. While requiring no security or guarantor can be a huge draw for borrowers looking for low-cost, personal loans, this may not be the most dependable way to ensure continued profits. The biggest competition for private lenders, when it comes to smaller loans, is the growing presence of payday lenders.
Despite pre-pandemic projections for the payday loans market being gloomy at best, recent rises in the cost of living have cemented these lenders as a permanent presence. According to Vantage Market Research, the US payday loans portfolio is projected to pass $40 billion by 2028, with the popularity of these loans skyrocketing in 2022.
Payday lending is an option for private lenders who want to quickly make up any profits lost in 2022, but experts still think longer terms with lower rates are more attractive to repeat borrowers. “You can really get yourself in a cycle of debt because it’s so much to pay back,” the COO of Forum Credit Union, Andy Mattingly, advised borrowers. “Maybe take 12 months or 24 months to pay that back.” This means if your lending service offers lower rates than payday lenders over a longer repayment period, your firm should be able to stay the course in the face of this new competition and maintain a trustworthy reputation.
Technology
Innovative financial technologies have long been an almost guaranteed way to improve your private lending services, increase reputability and attract new borrowers. But, predictably, fintech struggled in 2022 alongside the financial institutions that usually fund new projects and software development. In 2021, according to research firm GlobalData, fintech backing reached an all-time high across the world, with investments of $261.7 billion. However, in 2022 this dropped to a near-all-time low, with only $81.4 billion secured.
Alexander Weber, chief growth officer at neo-bank N26, weighed in on how decreased fintech investment will affect financial institutions, stating “more than ever before the outlook for fintech in 2023 will be dictated by external factors and ongoing economic uncertainty. In this context, the resilience of each company’s business model will be decisive; propositions with diverse revenue streams will be better positioned to absorb external shocks and to thrive.”
When it comes to private lending, this means lenders will need to think on their feet to ensure a steady flow of borrowers. “In difficult times, they need to do everything they can to be a true financial partner, empowering consumers to stay on top of their finances and develop a positive relationship with their money,” Weber continued. This solidifies private lenders in the lending market as a viable choice for those who will struggle to obtain loans from major institutions. For private lenders to best capitalize on this choice, helpful brand voices and customer-tailored technology will see the best results.
Finally, Weber commented, “to succeed, [fintech institutions] must keep up the pace of innovation in spite of current headwinds. Customers’ needs are constantly evolving, and this is particularly true in times of crisis. So, I expect to see greater personalization in both product and pricing in 2023 to reflect this.” This means private lenders can expect to alter their business models and fintech requirements consistently through the coming year. Unfortunately, this has to be done through a process of trial and error, to find software that best meets customer expectation and ensure continued success.
Partnerships
Partnerships are a dependable way for private lenders to grow their businesses and market share and attract larger clients and borrowers. Thankfully, in 2023 this area of private lending is one that will be strengthened under the coming economic uncertainty.
Pat Bermingham, the CEO of Adflex Global Payments, states “in the years to come, we can expect to see an increasingly close relationship between banks, fintech and back-office system providers.” For private lenders, partnerships with fintech companies and other lenders will ensure profits remain stable, and unnecessary and expensive processes are removed. This can also provide increased security and a way to combat the rising likelihood of late repayments.
“The focus in 2023 will be very much on optimizing payment options,” Bermingham expects. “While companies previously needed to monitor multiple portals and manually track their payments, technologies like straight-through-processing (STP) are gaining traction as a way of automating such processes.” Of course, this means private lenders may have to bite the bullet and invest in new technologies that service the borrower. Partnerships are a sound way to raise the funds needed for these improvements, and will likely influence the size and type of private lenders and fintech institutions you may choose to do business with.
Regulations
Finally, although private lenders are subjected to far fewer regulations than major financial institutions, many experts still expect an increase in regulations across the entire lending landscape. Mike Beckley, CTO of Virginia-based cloud computing company Appian, forecasts “increased scrutiny on process controls and higher regulatory enforcement from governments,” while global economies recover.
Beckley comments that lenders should be ready for increased challenges in 2023 relating to the reliability and viability of cryptocurrencies, and the enforcement of ESG policies. “Financial services and insurance (FSI) organizations are especially facing an increasingly complex regulatory landscape and more scrutiny over the next three years. To stay compliant and competitive amid new regulatory pressures, FSI organizations and other businesses operating in highly regulated sectors must ensure end-to-end process control with ESG monitoring and reporting.”
Again, this means private lenders will need to invest in and embrace helpful technologies in their practices. Relationships with reliable and technologically literate accountants will likely become the key to ensuring continued success throughout the year and deciding your next moves. Increased monitoring and reporting of loans, although not yet required by regulatory bodies, is a must for private lenders that want to maintain their stake in the market and improve their reputation to borrowers overall.
How to Stay On Top of Changes
Competition - When a borrower opts for private lending over official routes, private lenders usually only have to compete with other private lenders in their particular loan market. However, all financial institutions will be competing to secure borrowers amid decreasing rates. Keeping an eye on what other lenders, official or otherwise, are doing to combat the challenges in 2023 can help private lenders keep up with changes and remain attractive prospects to borrowers.
Mortgages - Depending on how you prefer to run your practice, it may be worth considering offering variable rates and tracker mortgages. The interest rates on these mortgages will change depending on the average rates. Some customers may prefer variable rates and others may prefer fixed-rate mortgage repayments, so while this decision might not attract new borrowers to your practice, it provides them with freedom in a post-pandemic market where they likely have to take what they can get from major financial institutions. In terms of your practice, tracker mortgages do mean you and your accountant will need to keep a close eye on payments and consider automating certain areas of the process.
Personal Loans - Personal loans don’t look to be going anywhere, however introducing payday loans to your practice’s offerings is a sound investment. This decision will depend on where you want to plant yourself in the industry in 2023. If you’d like to rebrand as a payday loans firm, you’ll likely be able to maintain a steady stream of customers and profit throughout 2023, with repayments generally being made very quickly. However, if you prefer your personal loans to be the antidote to quick turnaround, high-interest payday loans, you’ll likely be able to attract trustworthy borrowers and guarantee a repayment when the term ends. Bear in mind that those who offer payday loans are also subject to an array of regulations you may not have to deal with as a private lender.
Overall Opinions
According to the experts, in general, 2023 looks set to be a challenging year for the private lending industry and the loans industry as a whole. Staying on top of income streams, attracting new customers with lowered rates and diverse offerings, investing in technology, and keeping a finger on the pulse in terms of new regulations and your competitor’s choices, will be the keys needed to succeed. While you shouldn’t make any rash decisions where your practice is concerned, 2023 can be a year of consolidating your practice’s existing strengths and diversifying your offerings, ready to return to normality, as a key player in the industry, in 2024.
Sources
https://smartasset.com/personal-loans/how-private-money-lending-works
https://iclg.com/practice-areas/lending-and-secured-finance-laws-and-regulations/usa
https://fox59.com/indiana-news/payday-loans-never-an-option-to-make-ends-meet-experts-say/
https://www.vantagemarketresearch.com/industry-report/payday-loans-market-1512
https://www.verdict.co.uk/50-fintech-experts-share-industry-predictions-for-2023/
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