Can Marketplace Lending Go the Distance? An Insider’s View Part II

The first installment of our discussion with Susan Joseph covered why 2014 was the year for Peer to Peer or Marketplace lending. Today we look into why she thinks it will be successful, and what products she offers, and how well the auction is performing.

DG: Customer acquisition is always the critical piece. As these platforms move to business loans from consumer, what thoughts do you have around their ability to scale?

SJ: The devil is in the details. Customer acquisition is unpredictable and the cost is high. You win on volume. The market for business loans is very fragmented and it is not obvious where the borrowers are. Typically, loan brokers and direct marketing are used to acquire customers. Loan brokers charge a fee which very definitely eats into loan profitability. You can scale this, but finding customers without a broker is a hard nut to crack. Aligning with a trade association may help. The franchise market is untapped by any platform to date. Apple Pie Capital, a platform dedicated to franchise lending, plans to launch its Marketplace in early 2015. They’ve gone about customer acquisition through a specific market segment.

The supply chain is an untapped market. E-procurement and e-invoice Fintech vendors have unique access to suppliers who might be borrowers. They also know who pays their bills. So customer acquisition cost is almost zero for them and they have a huge piece of data that would allow them to mitigate underwriting risk. The Fintech vendors are perfectly positioned to jump in and either partner with a platform or take over a good part of this type of lending.

DG: Susan, not speaking for all investors, but we know there is much institutional money interested in funding these platforms. What risks do they need to be aware of in the loans they purchase?

SJ: Great question, David. The underlying loan is the backbone of these types of investments. Loss rates matter. If the loan defaults, your investment defaults. So, know who your borrowers are, what the characteristics are of the loan you’re buying, the default rate and your risk appetite. Data provided through a platform’s API about the borrowers and loan performance can help. Understand whether the loan is secured or unsecured and if it is in the form of a note or a whole loan. Your rights to enforce your investment depend on what’s in the contract.

DG: You talk about having good APIs in order to know the characteristics you are investing in. Can you explain further?

SJ: The API is critical because it communicates information about the loans. Marketplace lending is unique because it offers its investors a deep dive into its data. This means, in practical terms, you have a lot of good information about the underlying loan, you know what you’re buying and can plug that API communicated data into your own investment model.

The API can be a differentiator for a Marketplace platform. For instance, Prosper is very generous with its data and offers a great window into its borrowers through its API.

Lending Club historically was very transparent in the data communicated by its API. Recently it eliminated some of the data. This raises a flag. Anyone who built a model and invested based on that previously available data will have to rebuild the model and revise their investing parameters. You can appreciate that as an investor you are now operating in a more blind fashion.  I would expect emerging platforms to be generous with the data communicated through their API. They are growing their businesses and need to encourage investors to buy their loans, so the more transparency the better.

I’m in favor of more transparency to grow the asset class. There is no historical data to analyze how the asset class performs over time, so the fundamental premise that you know what you’re getting into when you invest because you have the data to analyze will go a long way to creating an efficient stable market.

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