How will P2P lending fare in a downturn? Can the industry improve securitisation practices? Why did growth slow last year? Is China really the most exciting market? What will consolidation mean for the industry?
These are just some of the questions thrown about at LendIt USA. With over 4,000 attendees, including the world’s leading platforms and industry experts, it is the largest collection of people in the alternative finance industry in the world. These are the key topics everyone was talking about.
VCs are less interested in P2P lending
Venture Capital funding in P2P lending peaked in the second quarter of last year, according to US industry giant Lending Club. Now it’s declining.
While some at LendIt have said that this waning is down to VCs becoming more discerning, BJ Lackland, the chief executive of Lighter Capital, which invests in alt fi companies via royalties-based loans, says that a lot of VCs were “over exuberant” on a few opportunities, and now we’re seeing them pull back.
It’s either that, or they’re “unsure about the market”, he adds, so are becoming more risk averse. “They want to see a bit more traction, a bit more revenue generation before committing.”
So this is the time for the industry to “consolidate, and keep expenses down” says Renauld Laplanche, founder and chief executive of Lending Club.
The alternative finance world is going to get smaller
With less VC money, everyone in the industry knows that industry consolidation is approaching across the globe.
As chairman of ThinCats, Kevin Caley, wrote in City A.M. about the UK market: “the only practical way for new entrants to get into the market over the next 18 months will be to buy into an existing regulated platform, fast-tracking the regulatory process. As such, the market value of smaller platforms will not be related to their loan book, but will be based on their software and the intrinsic value of their FCA regulation.”
Millennials expect banks to die
According to research from Lending Club, 50 per cent of millennials expect fintech to radically change financial services.
And 70 per cent think consumer finance will look fundamentally different in the next five years. Crucially, over a third (33 per cent) think they won’t need financial services from a bank at all.
While this provides those in the online lending industry with an unprecedented opportunity, platforms are also acutely aware of the continuing need to create a customer experience which enables them to acquire new, and retain current, users.
Getting a loan is faster than ever
US firm Credit Sesame has unveiled a “SnapLoan” which enables borrowers to get a loan in just one click. Chief executive Adrian Nazari explains: “like Snapchat, this changes the way consumers receive, in this case, loans.”
With over 8m users, the platform picks up highly creditworthy borrowers, who are already hunting for an appropriate loan, usually to consolidating existing ones, and provides them with a menu of options from different providers – much like Amazon’s “one-click purchase”. “We use our data and analytics to bring users highly targeted loans,” says Nazari.
Alternative student finance is hotting up (at least across the pond)
While the UK has some fantastic startups focusing on providing competitive loans to students – like EdAid – the US’s private higher education system makes it far more conducive to innovation in the sector, and the numbers and variations of platforms offering student finance is growing fast.
Jereme Albin, operations manager at Credible – like a Comparethemarket for students – explains how more competition in the marketplace has seen platforms like his become even more innovative.
Loans and refinancing firm LendKey has just announced that it’ll be deploying more than $1bn in lender capital to its student borrowers. And its chief executive officer and founder, Vince Passione, says that the size of the market in the States is so big that “it’s clear that online lending is no longer ‘alternative’—it’s simply what borrowers have come to expect at any stage of their credit journey—access, speed, and transparency.”
China might surprise us all when it comes to regulation
China currently has over 3,000 marketplace lenders, and it’s the largest market for P2P in the world. Ning Tang, the chief executive of CreditEase, the biggest platform in the world, says it’s still “very difficult to separate the good ones from the bad ones”, but he is confident that, following central bank guidelines last year on how to regulate and promote the alt fi industry, the whole framework will become increasingly clear.
Make no mistake, the Chinese marketplace lending landscape is very convoluted and still not well understood – although a Judge Business School report earlier this year has, for the first time, benchmarked it against other countries. But, taking a long-term view, Tang thinks there’s reason to be optimistic about the country’s ability to lead with “smart regulation” for the sector.
“In China, because the credit infrastructure is still in very early stages, regulators take a more flexible approach,” he says. Already, different segments of the market – P2P lending, crowdfunding, mobile payments – have their own responsible agency, which could go some way to ensuring that regulators are trained in those specific sectors.
Securitisation is necessary – but more standardisation is needed
As the industry gets older, and with concerns of an economic downturn not going away, increasing numbers of industry commentators are stressing the need for liquidity via a secondary market in P2P lending – and, therefore, for the need to securitise loans.
Hyung Kim, who’s firm Ldger provides platform-based structuring for alternative finance products, says that while good efforts are being made to bring transparency to existing structured products offered by platforms, there needs to be more standardisation in the alt fi securitisation. Currently, levels of disclosure vary considerably across the industry.
Nevertheless, Ram Ahluwalia, co-founder and chief executive of PeerIQ, stresses that, whatever happens, we won’t see a 2008 scenario play out. “We’ve come a long way when it comes to securitisation. Within marketplace lending, the capital set aside per loan is very high. And it’s even higher within securitised products.”
Rise of the specialist white label company
There are a rising number of companies which offer platforms white label products, meaning the latter’s time is not taken up building their technology from scratch.
Snehal Fuzele, founder and chief executive of Cloud Lending Services, which provides software to platforms, credit unions and banks, explains why this is important: “The smarter companies know that the innovation will happen at the underwriting and risk model level. That’s where they need to focus their time – they don’t want to spend it building platforms.”
SaaS companies like Mambu have taken this further, providing entire back-end cloud banking platforms – again, selling not just to P2P firms, but to banks too.
Cormac Leech of Liberum investment bank points out that this year's conference saw significantly more attendance from smaller US banks that are "now playing catchup with respect to fintech. Previously many had been relatively complacent about the risk of losing market share to P2P lenders. They are now actively looking to partner with platforms and digital lending software providers to stay competitive."
Fintech: Watch out for the banks?
The usual narrative is that banks need to watch out – because fintech is eating their lunch. That said, there are signs that increasing numbers are innovating fast, and online lending platforms are a key element of this.
Banks have moved from partnering with P2P lenders and deploying capital on their platforms, to benefiting from automated underwriting systems developed by platforms, which can be packaged up and used by other lending institutions.
Eugene Danilkis, founder and chief executive of Mambu, says that, “while some banks will make an honest transformation, others will realise the existential threat, but end up competing with their own traditional businesses.”
It’s just a “question of timeframes,” he continues. “If it’s a two to three-year threat, there’s no reason to act. If it’s a five to 10-year existential threat, they’ve still got the time to act – but must do so quickly.”