1. 2018 will be a year of instability after a stable 2017. We’ve been pacing our industry on a positive and very stable 2017. We saw the unemployment rate dip in July to a 16-year low of 4.3%, and more than 1 million jobs were added by employers since the presidential election. Economic growth accelerated, doubling to 2.6% during the second quarter and the Dow hit its highest closing record, setting 58 new record closing highs in 2017.
Small business optimism peaked as well. The percentage of small business owners planning to make capital expenditures in the next three to six months reached its highest level since 2006, according to the National Federation of Independent Business (NFIB) Index of Small Business Optimism.
The reality is, it just isn’t viable to sustain the momentum we saw in 2017 and the potential for relative economic instability is certainly there for 2018. We know the Federal Reserve plans to raise rates one more time before the year is over, resulting in higher rates across the board for credit cards, traditional credit facilities and of course, the cost of capital. If rates are on the rise and the economy is less growth driven than it is now, there isn’t much room to the upside.
If the unemployment rate continues to stay at a record low for the next year, holding steady at 4.6% as projected, wage inflation can become an issue, undercutting the economy in a variety of ways.
In 2018, one or more of these variables will likely shift. It’s like a house of cards; if any one of these things go sideways, it will have a toppling effect. Adaptability is the name of the game for alternative finance companies and small business funding sources. Be prepared for how your business will react to these changes.
2. There has been, and will continue to be, a significant uptick in fraud. As the alternative finance space grows into a more validated source for funding and increasingly is accepted as more mainstream, the threat of fraudulent activity will continue to grow right along with it. There are many financing companies with solid business models, but their predictability in credit performance and their profitability has taken a hit because of the rise of fraud in 2017. This exists everywhere and occurrence in the alternative lending industry will continue to increase in 2018. At Reliant, we’ve seen everything from fraudulent secretary of state forms, tax returns, bank statements, falsified leases, identity fraud and business licenses. It’s imperative that companies in this space always protect the end user, the REAL client first. As this becomes a bigger issue, the industry must contend with it by pricing risk accordingly and of course, investing in and utilizing improving identification validation tools and fraud detection techniques.
3. Increase in 3rd party security enhancements. As a direct result of increased fraud in the alternative lending industry, we will also see increased budgets to guard against threats to protect sensitive data. Each year, fraud technology solutions evolve in more sophisticated and intuitive ways. 2018 could be a big year for more advanced solutions to come to the forefront to solve the unique issues our industry faces. In addition, innovative risk mitigation and underwriting techniques will continue play an important role to guard against fraud as well.
4. Continued Consolidation (Restructuring/Closing/Mergers/Acquisitions) There’s been significant shakeup in the alternative finance space this year. Top industry players with lots of tenure in small business funding like the newly restructured CAN Capital and Bizfi, saw trouble earlier this year. As the economy improved in 2017, companies on the top of their game grew more daring in adapting their products/services to maximize the opportunity in response to American business, but may have lacked the proper controls, planning, preparation and loss mitigation.
Over the past couple of years, we’ve seen some funding sources move away from their core competencies, which resulted in overextension throughout industry. With the expectation that 2018 is going to be a less stable year, it will put pressure on the companies which overextend themselves to improve their business models and adapt. Those best positioned in moving forward successfully, will be rock solid on the services they perform the best. In 2018, it will be most important for leaders to carefully control the levers on who they fund, how much they provide, the length of terms and costs as well as controlling internal expenses. Additionally, for the alternative finance industry, it’s our job as a responsible funding source to not overextend our clients. The client should always come first.
5. There will be more disruption from big brands entering the small business finance space. Over the summer this year, we saw global payments processing company PayPal, acquire Swift Financial and expand its own working capital product through Swift’s underwriting capabilities. With over 2 million sellers on its platform, the Amazon Lending program, has funded more than $1 billion loans in the last year. American Express and Square are also firmly in the space, driving competition and increasing the level of service expectation from our clients.
These are the perfect examples of big brands tapping into existing customer data and relationships to create another revenue line. We can expect to see more recognizable names entering the small business finance space, using their data to market to and determine the creditworthiness of current customers.
One of the biggest challenges for companies in alternative finance space is developing a relationship with the end user. There is a cross competition with the companies that already have these relationships in place. Expect to see additional partnerships like On Deck and JP Morgan Chase and acquisitions like the one between Paypal and Swift. More recognizable brand names will enter the space, as they already have the visibility and the relationship with clients. The non-bank funding aspect is being inserted into the game with total visibility across other leverageable channels. These companies can easily identify who to give money to and better determine the associated risks. All parties stand to gain from the disruption alternative finance companies are creating, and most importantly, the customer wins in all scenarios.
For 2018, partnerships and existing alternative finance companies will need to focus on a stellar user experience, transparency and improved technology to stay competitive.