By Bernard Lunn
Thesis: hunger on origination side from small business + hunger on investor side starved of yield by prolonged ZIRP + banks withdrawing due to balance sheet and capital ratio issues = window of opportunity big enough to drive a truck through.
+ Lending Club valued over $5 billion in public market after their Netscape moment for Fintech IPO.
+ Prosper $5 billion loaned to 250,000 people.
= investors willing to write really big checks to back the big winners.
These businesses are scaling like crazy and are still no more than 5-10% into the market. This Morgan Stanley report has the data.
It looks like the big marketplace winners have already been declared. Before the SOFI and Avant announcements, I would have said the same thing. If there is another strong team with great traction out there, expect to see open check books being waved around. It is certainly too late to start a marketplace from scratch – those days are over. I also see the end of niche plays. SOFI may have started with student loans but all marketplaces win on network effects and volume. So whether you are consumer or a business and within consumer whether you are a Millennial Student or a Baby Boomer refinancer does not matter.
However here are 5 second order impact type of opportunities. Moving into a hypergrowth market is great if you have a unique proposition. You don’t need to worry about market demand, only about how you get traction with a new service.
- More innovation on originations front. Today we are seeing relatively simple digital data entry by borrowers and basic data science as the key innovation. That was enough to get traction in the early days simply because the lumbering paper driven process at banks was so bad. Now that a digital origination service is the baseline, we can expect to see more innovation on both the data capture side and the data science part. Innovators that we are seeing on this front include Kreditech and IWOCA. It is likely that some of these innovators will be acquired by the big marketplaces.
- Serving entrepreneurs in the “markets formerly known as emerging”. These entrepreneurs have been even more badly served by banks than their peers in the West and they have high GDP growth economies on their side. For example, see what this entreprenur turned VC turned entrepreneur again – Alok Mittal – is doing in India.
- Banks will find a role to play by being the low cost capital provider. This is what Banks do in Corporate Lending – a low margin high scale game where cost of capital is the primary issue. They will mostly exit the originations business; some may decide to be a player in originations by buying one of those innovators. Banks never liked serving small business anyway. Now they can just lend to bundles of small businesses as if they were one large Corporate.
- The Wealth Management industry reshapes around this new reality. They will work with the emerging breed of micro asset managers who know how to process the data streaming out of lending marketplaces using their APIs to offer their clients a better risk adjusted return on capital.
- The move from short term lending to term lending. Nobody wants to repeat the Wonga debacle. Merchant Cash Advances are not much better. Term Loans at transparent APR is what any prudent small business owner wants. That is why we highlighted Dealstruck a year ago. The firms offering short-term loans will move more into term loans as competition and transparency puts the focus on APR. The short-term lenders making that transition will have one big advantage – data. The data on who repaid short-term loans and how much revenue and cash flow coverage they had to do that is key to assessing their credit worthiness for term loans.
Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.