Starting in 2005, when the P2P segment first emerged, the alternative lending industry has been growing rapidly and increasing access to capital for small and medium enterprises (SMEs) and individuals.
Alternative lending caters to those customers who need cash but might not qualify for traditional bank loans. It is characterised by innovative financial instruments, channels and alternative lenders win market share by providing products with lower interest rate and simplified application processes.
Rising number of new entrants keeps the alternative lending market quite active and enables it to respond quickly to new financial product development. Thus, it is not surprising that we see new players attracted by the opportunity brought by bitcoin. In recent years, we see players like BTCjam and Bitbond draw investors’ attention.
The Dynamics and Trend
During the past few years, we have witnessed an increasing number of alternative lenders going public and growing participation of Venture Capital in this sector. Popular examples in 2015 include Lending Club’s IPO announcement (valued at USD 9 billion), Yirendai becoming the 1st Chinese P2P lender listed on NYSE, Alibaba’s partnership with Lending Club to reshape global supply chain finance.
As the industry is maturing, we can expect the below key trends to affect alternative lenders:
Increasing regulatory scrutiny: Growing requirements to protect the market
Credit assessment improvement: Development and enhancement of database and credit model
Funding cost reduction: Lower rate of borrowing driven by competition in the marketplace
Product expansion: Diversified product offering to better serve customers
Let’s look at the regulation and credit scoring trend first, two challenging areas in the alternative lending space.
Increasing Regulatory Scrutiny
In the past, due to the relatively small industry size, regulators preferred a wait-and-see attitude while alternative lenders took advantage of lower regulatory burden over traditional banks. But as the industry is maturing in different regions, regulatory scrutiny regarding investors and borrowers’ protection and transparency is increasing.
In the US & UK, where the alternative lending market is quite mature, the law regulates all aspects of the credit life-cycle, including privacy, data security and anti-money laundering laws.
Compared to other regions, few regulations on alternative lending market exist in Asia. However, some Asian countries have established relevant regulatory frameworks recently and we expect similar initiatives across the region this year. India and China have initiated proposals for implementing regulations in the near future; Singapore also expects to regulate platforms attracting large concerns.
Here is the summary of the recent regulatory events in different countries.
(Source: CH&Co. analysis on the recent regulations across regions, April 2016)
Credit Assessment Improvement
The alternative lenders in the US still mainly rely on the de facto standard FICO score. However, with emerging technology on big data, global alternative lenders can go beyond credit scores provided by credit bureaus, considering that their main customers are SMEs or the unbanked individuals.
In the digital age, this can be achieved by accessing tons of data collected via mobile apps, online social media, personal purchases and payment histories. Below is the list of alternative credit scorers.
As there is a growing demand for an enhanced credit scoring method to better gauge credit risk and provide more suitable pricing, we foresee new entrants to offer alternative credit scoring solutions in alternative lending market.
Alternative Lenders: Partner or Competitor of Banks?
Alternative lenders and banks have their own strengths and weaknesses. Alternative lenders have technology banks need and the latter has a large customer base that the former lacks. Thus, there is an opportunity for collaboration, which benefits both sides – a win-win situation. Moreover, with a strategic partnership both the parties can improve the overall customer experience and access to funds.
Through partnership, alternative lenders can achieve funding cost reduction and product expansion – the other two challenges we mentioned earlier. They can benefit from a bank’s lower cost of capital as well as expanding their offerings to credit products with longer maturity like loans or mortgages.
For banks, there are four key benefits from collaboration:
Automated loan distribution and underwriting model: Originating instalment loans through an online channel has proven to be a strong value proposition to both consumers and traditional players.
Joint product development: Banks can think about new forms of hybrid offering, such as cross selling bank products on P2P platforms and interactive payment transactions by leveraging start-ups’ market channels. For example, Alipay teamed up with Bank of Shanghai in 2015 to provide users online cross-country cash transfer services.
More accurate risk assessment of small business: Using innovative risk assessment systems from startups, banks can offer more customized credit products and pricing packages. P2P credit scoring start-up Lenddo brought social tech to banks and connected with financial institutions like BanKO to provide more dynamic risk assessment approaches.
Better chance of reaching unbanked or underbanked sector: P2P is extending the possibilities for financial inclusion by mobilizing available money into underserved areas. For example, Kiva, the non-profit P2P lending platform, serves directly in 85 countries attracting global lenders lend at 0% interest to alleviate poverty.
We have seen some collaborations between alternative lenders and traditional banks. In December 2015, J.P. Morgan announced a strategic partnership with OnDeck to offer small-dollar loans to small-business clients. These almost-real-time approvals and same- or next-day funding services remove lending pain points and improve the overall customer experience. Similar partnerships are expected to better serve small businesses and retain customer relationships across the competitive market.
What are your views about the future of collaboration between alternative lenders and banks? Email us, we would love to hear them.
The Latest News on Alternative Lending
Startup Funding Societies are changing lending in Southeast Asia Kelvin Teo, a Harvard Business School student building a Web-based P2P lending startup as part of his curriculum, is potentially partnered with DBS Group Holdings Ltd. The startup, now with 39 employees, has arranged S$5.5 million ($4.1 million) in loans, Teo said. Funding Societies charges a 3 percent to 4 percent origination fee to borrowers and keeps 1 percent of repayments to investors.
New FinTech Office: a one-stop platform to promote Singapore as a FinTech Hub The Monetary Authority of Singapore (MAS) and the National Research Foundation (NRF) announced today that a FinTech Office will be set up on 3 May 2016 to serve as a one-stop virtual entity for all FinTech matters and to promote Singapore as a FinTech hub.
JD.com invests in P2P lending site Meili Jinrong China-based e-commerce firm JD.com has invested an undisclosed amount into Meili Jinrong, a local peer-to-peer (P2P) lending platform, through its finance arm JD Finance according to a report. The two companies intend to work together to better serve the second hand car loan market, and expand into other areas within personal finance.
Reserve Bank of India Expected to Post P2P lending Regulatory Concept Paper End of this April In the first bi-monthly Monetary Policy Statement, 2016-17 Dr. Raghuram G. Rajan, Governor of the Reserve Bank of India, stated that a conceptual document will be posted on their website by the end of the month. A Concept Note on P2P lending will be put up on the Reserve Bank’s website for public comments by April 30, 2016 and based on the feedback, the contours of regulating P2P lending will be decided in consultation with the SEBI.
China sets up industry group for Internet finance China’s central bank said that firms involved in Internet finance had set up an industry association, as authorities try to get a handle on the rapidly growing but weakly regulated sector. The group will seek to “self-regulate” the industry at a time of growing risk from Internet financing, according to a transcript of a speech by a People’s Bank of China (PBoC) official at the opening ceremony.
CH&Co. is sponsoring a blockchain summit in New York City that runs from May 2-4, 2016. The “CoinDesk Consensus 2016” event will bring leaders from startups, investment firms, and financial institutions that are all involved in real-world applications of blockchain technology.
Daniel Corrales, Managing Partner of the Geneva Office, has recently been interviewed by Instit Invest in order to share CH&Co.’s expertise on Robo-Advisors among other Finance professionals. Marc-André Leplay, Senior Analyst, contributed his groundwork to our industry insights.
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Chappuis Halder & Co. is a consulting firm specialized in Financial Services with offices in North America, Europe and Asia. We help our clients in several industries, Corporate & Investment Banking, Commodity Trading, Insurance and Retail & Private Banking, with a permanent focus on expertise and research, especially in the Digital area.
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