A sea of 300 suits is what I faced last week at the first Swiss Alternative Lending conference hosted at SIX and in partnership SIX and Lendity. I was privileged to know the inspiration driving the founders of Lendity, as they had shared their vision with me early on. The Karamanian brothers, Rafael and Armen, combine experience from the Sell and the Buy side and are full of passion about solving the problem for institutional investors that don’t have the size and the risk management analytics to access the marketplace lending marketplace sector in a compliant way and more importantly, in a way that optimizes their taxes and offers diversification across the multiple sectors and platforms.
In an earlier post this past February, titled A little bit of P2P is all I need – Mambo in Lending I looked at all sorts of investment vehicles that offer different types of exposure to this sector. Most were geared towards retail investors but not only. I did highlighted LendingRobot from the US, a Fintech that has been helping manage P2P portfolios and is in the process of launching a hedge fund for accredited investors that offers diversification both the asset level (i.e. consumer loans, student loans, SMEs, invoice, real estate etc) and at the platform level.
Lendity is focused on developing structures that a family office, an asset manager, a pension fund, can book on their books or a private bank can list in their private debt product offering for qualified investors. And at the same time include:
o Global exposure – US and Europe for now (USD, CHF)
o Asset diversification – Consumer, SME, real estate etc
o Platform diversification
o Tax efficiency, despite the cross-border exposure
o Regulatory compliance, despite the cross-border exposure
o Private debt without additional counterparty risk from the issuer.
Lendity is really solving a pain point for both marketplace lending platforms and for institutional investors.
For marketplace lending platforms, Lendity acts as a marketplace that matches them with institutional capital from Financial advisors, Private Bankers, Pension funds, Family offices, and Asset managers (the 5 “investor” types). Lendity actually has its own proprietary system to qualify which platforms to partner with. Lendity, doesn’t originate loans but buys loans from the qualified marketplace lending platforms in a way that allows them to create the “dream” structure for the 5 “investor” types.
For a start, Lendity has qualified one US, one European and 3 Swiss platforms – Upstart, Lendico, and Cashare, CreditWorld, CreditGate24, respectively.
Upstart out of California, is mostly consumer lending but also business lending ($130k average size – 3/5yr loans). Founded in 2012 and with a total funding of $85mil, has logged in my Fintech brain folder as the “personal FICO score disruptor”.
Lendico out of Germany but with an expanding presence in the DACH region, has the backing of Rocket Internet. Founded in 2013, offers both consumer and SME loans. Lendico operates mostly as a credit underwriting partner. They pride themselves for their proprietary credit model that they calibrate to local conditions in the different regions in which they operate. They have established partnerships with German banks; they offer personal loans in Brazil (mostly needed for the purchase of iphones!); Post Finance in Switzerland has invested in them even though their current by-laws prohibit them from lending. Lendico was always logged in my Fintech brain folder as “Lender daring to go cross-border”. They are currently operating in Germany, Switzerland, Austria, Holland, Brazil. They organize challenger events towards improving their credit model; by giving access to their data to developers that get the opportunity to test their ideas.
Cashare is the oldest Swiss crowd-lending platform for both consumer and SME loans. Since they ironically launched in 2008 when Switzerland and Europe still thought they were immune from the US subprime crisis; they are a living proof of survival through a major black swan crisis. Up to 2014 they were the only Swiss company in the space! I need to file them in my Fintech brain folder as “subprime crisis survivor & daring to be alone for 6yrs”. Check out the stats of this old-timer here.
CredtiGate24 is a new Swiss lending platform, launched in 2015 for both consumer loans and SME loans (in the order of CHF 100k). They use credit analysts to access the creditworthiness of the business borrowers. I now understand their differentiation better and have filed them in my Fintech brain folder as “mostly front-end automation in lending, ideal for channel partnerships with banks”.
CreditWorld is only focused on SME lending and the average size seems larger than the rest (close to CHF1mil rather than around CHF100k). Their focus is on the creditworthiness of the borrower. Their process differs in that they use both a rigorous internal process for evaluating the creditworthiness but also an additional external party, Euler Hermes owned by Alliance, as an independent third party check. I need to file them in my Fintech brain folder as “Extra SME screening: plus third party credit check”.
Just with this first batch, one can see that even for those that continue to invest in Private loans (a traditional asset class) the exposure that Lendity will be offering through efficiently pooling loans from these qualified platforms, adds value. These platforms are lending to consumers (in addition to the credit-card receivable space) and to businesses that aren’t serviced from the banks or the non-bank lenders. These borrowers are serviced because of the reduced cost of customer acquisition and (hopefully) the better credit pricing algorithms coupled with the ML algos on the accumulated data. This latter part is significant. Deep learning (a sub-vertical of AI) can be used to improve credit models. More data and use of non-conventional data (e.g. which social channel does a consumer engage on more frequently, Ebay purchasing history etc) is the only competitive advantage that will differentiate marketplace lenders. I totally agree with Guenther Dobrauz, PWC financial services partner, who alluded to the fact that the marketplace lending sector will grow through consolidation. Collecting data will improve the ability of pricing risk and therefore, the ability to be profitable with narrower margins. So, big players will price risk better.
Lendity is in the business of partnering with the players that price better and offering a much needed diversified structure to the 5 “investor” types that need it. We will be watching their journey.
Efi Pylarinou is a Fintech thought-leader.
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