Highlights of The Americas Alternative Finance Benchmarking Report

The Cambridge Centre for Alternative Finance and the Polsky Center for Entrepreneurship and Innovation at the Chicago Booth School of Business recently collaborated on research looking at the alternative finance space.  This report is the first of what will be an annual research collaboration.

This is especially timely given the recent stumbles of OnDeck, Prosper, Lending Club and other marketplace lenders.  Many are questioning the online marketplace lending model.   Prosper decided to eliminate 22% of its workforce and OnDeck announced last week a much larger than expected loss due to flat loan volumes, narrow gain on sale margins and rising expenses.  LendingClub’s CEO and founder Renaud Laplanche resigned as chairman and CEO last week. The sudden decision was based on the discovery that $22 million in loans from a single institutional investor were sold "in contravention of the investor's expressed instructions."  This comes on top of the fact that Lending Club is audited by Deloitte, the same firm that audited Bear Stearns and Merrill Lynch.

No, it hasn’t been a good few weeks for Marketplace lending. So Alternative Finance is going through some severe growing pains, and learning tough lessons that it is sometimes harder to compete with banks that have cheap sources of deposits than to rely on fickle institutional investors who are there one day and gone the next.

But what makes the Cambridge study interesting is they are pulling data (albeit via surveys) from over 178 platforms from both Canada and the US. To compare apples and oranges requires a taxonomy - The survey incorporated a platform-model taxonomy derived from previous benchmarking exercises in the UK and Europe. As they describe it, their definition of alternative finance “incorporates elements common to both uses of the term: instruments and channels of finance that emerge outside of the regulated banking system in both developed and developing economies.”

The report analyzed technology-enabled online channels or platforms that act as intermediaries in the demand and supply of funding to individuals and businesses outside of the traditional banking system. As it relates to business lending, there were four categories:

  • Marketplace / P2P Business Lending
  • Balance Sheet Business Lending
  • Invoice Trading
  • Marketplace / P2P Real Estate Lending

The Findings

Despite the recent news stumbles, the consumer and small business acceptance of online lending has continued to grow. Alternative finance industry grew to $36.49 billion, a 212% annual increase from the $11.68 billion in 2014. Between 2013 and 2015, alternative finance platforms across the Americas have delivered over $50 billion in funding to individuals and businesses, with the US market contributing 99% of the total funding volume.

Business lending is still small relative to consumer - Marketplace/P2P consumer lending is the largest market segment in the Americas, with $25.74 billion accrued in 2015. Balance sheet consumer lending is in second place with $3.09 billion, followed by marketplace/P2P business lending at $2.62 billion in 2015.

Businesses are increasingly tapping Alternative Finance: In the US, between 2013–2015, online alternative finance platforms have facilitated over $10.81 billion worth of growth, expansion, working and venture capital to 268,524 small and medium enterprises (SMEs).

Entrenched institutionalization in the US market: Between 2013–2015, over 72% of marketplace/P2P business loans and 53% of marketplace/P2P consumer loans were funded by institutional investors via online alternative finance platforms in the US. Furthermore, almost 83% of the invoice trading model and 74% of marketplace/P2P real estate loans were also funded by institutional investors, typically including mutual funds, pension funds, hedge funds, family offices, asset management firms and traditional banks.

Alternative finance has evolved quickly over these last few years from a novelty to one that is helping both consumers and small business alike. The technology has proven scalable and recent bank partnerships such as Regions-Fundation and OnDeckJPMorgan prove the interest of the banking community in understanding new forms of risk underwriting. Certainly more regulations is a given, especially to create more borrower friendly regs. I have written about this here - How Marketplace Lenders Can Better Protect Investors and here - Department of Treasury’s Plea to Understand Online lending

Stay tuned, it's about to get a lot more interesting with marketplace lenders.

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