It Feels Like 1999 All Over Again for Marketplace Lending


In some ways it feels like 1999 all over again in the fintech B2B lending world. It seems there is no shortage of new consumer or small business lending models that are rushing to use analytics and social media as their new underwriting standards.  Media joins the rush to talk about this new world.  There was recently a piece in Fortune talking about Why Facebook Profiles are Replacing Credit Scores.  Or Are LinkedIn Profiles Better Credit Barometer than Loan Applications?  And JP Morgan's recent partnership with OnDeck was certainly a shot heard around the world.

But a big question is how do Marketplace Lenders underwriting and business models differ from banks?

SME Marketplace lending is growing at a fast clip but still pales in size relative to total bank lending to SMEs. Morgan Stanley in their 2015 report estimated the overall market to be between 14 to 18 trillion.  Right now, the countries with the biggest marketplace lending for small Mom & Pops are in the UK, USA, and surprisingly or not China.

Marketplace lending’s model is quite different than banks. In fact, it reminds me of the difference between factoring and online merchant cash advances.  On the one hand, you have information heavy, relationship and operationally light businesses devoted to speed (marketplace lender, online merchant cash advances).  On the other hand, you have relationship and operation heavy but information light businesses (banks, factors).

  • Most bank lending is secured and relies not just on the primary source of repayment (cash flow) but also a secondary source (collateral), which for small business takes the form of some personal guarantee (no, not my house!). Marketplace lending is typically unsecured and requires no collateral. Small businesses benefit especially from this, particularly in the service sector. Often, such businesses have rather stable cash flows but no tangible collateral that banks could lend against.
  • Second, marketplace lenders do not fund themselves with insured and highly regulated depositor money. Instead, they source funds from retail or institutional investors with a higher risk appetite and who do not have the same regulatory capital requirements and AML/KYC compliance rules that the banks do.
  •  Third, what businesses gain in speed and simplicity from these marketplace lenders they pay for in the price of money – it ain't cheap. Goldman Sachs estimated OnDeck’s price at 51.2% in the 4th quarter 2014.

The new underwriting methods that marketplace lenders have developed to take advantage of this new digitized and social media world has certainly allowed them to assess and take risk where banks can not or have not with their traditional small business lending methods. This is the greatest innovation and one that will most certainly be adopted by banks somehow going forward, especially given the recent news of JP Morgan and OnDeck’s relationship.

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