The weather was beautiful in London, the location was upcoming (O2 North Greenwich) and the size of the conference was ideal. The two chairs, Peter Renton (founder of Lendit) and Christine Farnish (chair of P2PFA) were both great on stage as they covered an industry that has been tainted in 2016 and that has clearly lost its hype.
I gathered lots of insights from the sessions and from talking to attendees. I share here some highlights and look forward to continuing publicly the conversations that these insights open up, on the Fintech Genome.
THE SECTOR IS READY FOR THE GOLDEN AGE:
- Samir Desai, cofounder of Funding Circle, shared his vision in a nutshell:
- “The Golden Age is in sight in marketplace lending” as the disruption through capital light business models spreads everywhere.
- Neil Rimer, co-founder at Index Ventures (early investor in Funding Circle)
- You have to be in a market, the lending market, that has a trillion-dollar addressable audience; We are entering into the golden age of this new asset class.
- Phin Upham, from Thiel Capital, said:
- If you are looking to raise money, go into Insurance. The hype is gone in the US lending market, so it is very difficult to raise equity.
- Platforms are entering into another phase; they are forced to innovate continuously and to scale either geographically or in terms of the loan type.
THE INDUSTRY NEEDS LOTS OF EDUCATION AND UNDERSTANDING: The P2PFA which was co-hosting the conference, was not the only one, to repeatedly address the issue of misunderstanding of “What is this business all about?”
- Is it non-bank lending, which has been around forever.
- Is it unregulated bank lending, which will eventually lead to these platforms seeking or having to get a bank license?
- Are platforms simple originators for banks? Or matchmaking platforms? Or Tech platforms?
- Is this a new asset class?
- Is crowdfunding like direct online lending?
Engage in this open conversation here.
A NON-STANDARDIZED MARKETPLACE (a separate post will be dedicated on this topic):
- Borrowers – There is a large variety of loans. First, we categorize them in unsecured and asset-backed. Second, we have to distinguish by asset and maturity: consumer loans, auto loans, property, small business, working capital, invoice finance etc.
- Lenders – From the investor’s side, we have retail, government, private funds, asset managers, institutional investors. Each class needs-requires a different wrapper. From direct loans, whole loans, private funds, private bonds backed by loans in SPVs, BDCs, listed funds, securitized deals.
- The incentives for Financial advisors to step into this new asset class; are problematic.
THE INDUSTRY DISAGREES ABOUT THE BUSINESS MODEL: Engage in this open conversation here. Is the business model:
- Pure P2P platforms offering efficient intermediation between borrower and lender; with no inventory on the platform (e.g. RateSetter for consumer loans and Funding Circle for smallbiz loans)
- Using your balance sheet; Efficient servicing for borrowers; with a platform that has an inventory (a la Kabbage and LendInvest).
- Hybrid lending platforms.
RateSetter and Funding Circle, are strong advocates Against the hybrid model. The ecosystem can’t agree on One name, P2P, Market place Lending, Online Direct Lending!
NO AGENCY PROBLEM IN THE CREDIT ASSESMENT PROCESS: P2PFA commissioned report from economic research firm Oxera that focuses on consumer issues, risks towards designing an effective public policy. This is strictly based on facts and figures from the 8 members of the P2PFA which account for ¾ of the UK market. And even though, some said “please stop measuring success with origination volume”; this remains the metric for now. The Oxera report can be downloaded here. The most interesting question addressed is “Do marketplace lending platforms have the incentive to do effective credit risk assessment (since they don’t allocate their own capital but “other people’s money” and they earn the spread – which is around 4%)”? The answer is positive.
THE LENDING SECTOR DOESN’T POSE SYSTEMIC RISK: Lord Adair Turner, from the Institute for New Economic Thinking and author of the book “Between Debt and the Devil”, highlighted
- The fact that non-bank lending has traditionally been an important part of the economy.
- The fact that MPL platforms aren’t employing any radical credit analysis; they are simply executing conventional processes, in a “better” way.
- His conclusion was that the way to avoid a future blowup, is to keep the products and their distribution Simple & Transparent. Watch his speech here.
LENDING SECTOR SENTIMENT:
- Public stock prices have been telling us in 2016 that the expectations of the sector were unrealistic.
- UK listed investment trusts, are trading at deep discounts (15%) and the share prices have struggled since IPO. This IMHO is because they are complicated structures and therefore misunderstood. As they admitted (panel participation), they do need to become more transparent. For now, they will be buying back shares to try and close the discount gap.
- Credit spreads have widened in the US and the CHAI securitization deals is on watch from Moody’s. Deals are forced to offer increased coupons and wider spreads. At the same time, in the US the new securitized deals see tightening in the secondary market. In addition, the securitization volume overall has been increasing despite decreasing origination volume.
- Of course, on stage we heard that the recovery will come and there has never been a better time to switch from equities into P2P. This I find too strong a statement. Switching from other fixed income asset classes into P2P, is they way to go.
A FEW MORE INSIGHTS
- I suggest monitoring: Zopa which is the oldest of them all, operating from 2005. And Sofi in the US, because it has been remarkably resilient in the 2016 difficult environment for MPLs (See conversation here for a full list of possible factors and to engage).
- Sofi raised $1bil before LC accident
- They have been trying tons of new thing, while everybody else is cutting costs, they have launched 3 new products already this year.
- The consistency in the pipeline of securitization deals in Europe, needs to pick up. Follow the SOFI lead is the way to go.
- Be aware that after the Brexit vote; the engagement metrics on the UK platforms surged both on the consumer loan and on the property backed lending platforms.
- I suggest that you always check the Provision fund on any platform you consider engaging. The amount is important but pay attention to “how” it allocates in case of defaults (you wont to know the pecking order).
- Most platforms take their fees upfront; some are now taking out the fees through the life of the loan (e.g. RateSetter). Always a win for the customers.
- The Baltic have a significant presence in the Lending category. Twino, Bondora, Finbee, Mintos.
“Lendit” is echoing in my head. I actually think it is a brilliant name choice for this sector because it seems to me very Agile (if you happen to disagree, engage here). Today “IT” means (to most people) lending your uninvited cash to another person or company; and earning of course, interest. Tomorrow “IT” may also mean, lending securities (much like repos or shorting). Later “IT” may grow into, lending your digital assets (much like in acting as a guarantor, effectively lending out your creditworthiness).
- In the sharing economy, “Lendit” fits in naturally.
- “LendIt” speaks to the inertia of uninvested wealth.
- More women around and on stage are needed for next year.
- There was a hint about the need to focus and imporve the analytics and use ML; but more coverage of this area is needed.
- I am sure that next year there will be a more balanced mix of those involved in the ecosystem. More Spain, Germany and France. More banks that are involved in the direct online lending space. More about radical innovations in the lending sector.
The conversations continue on the Fintech Genome in the Lending category. This is a snapshot of the existing ones. Engage.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.