By Ryan Weeks on 21st February 2014
As we career through 2014 – the year many believe will be the tipping point for alternative finance – what are the big changes taking place in the AltFi universe?
Here’s a breakdown of my key takeaways over a hectic past month:
AltFinance Comes of Age
One of the major reasons we billed 2014 at the tipping point for alternative finance is that we anticipated a rising tide of institutional investment into the European space. That prediction is now coming to fruition. We have seen a string of equity investments into crowdfunding, p2p lending and invoice trading platforms. Two of the trailblazers within the space received a significant injection of capital this month. The crowdfunding giants Indiegogo captured a $40m investment from various sources – but leading the charge were Institutional Venture Partners (IVP) and Kleiner Perkins Caufield & Byers (KPCB). The UK’s very own Zopa was the beneficiary of a £15m investment from Arrowgrass Capital Partners.
Only recently AltFinanceNews Editor David Stevenson sat down with GLI Finance’s Geoff Miller. Miller has led GLIF on an aggressive altfinance investment drive. GLI Finance’s portfolio now includes an impressive array of alternative finance providers: FundingKnight, Platform Black, TradeRiver Finance, Raiseworks, European Receivables Exchange, Finpoint UK, Sancus, Proplend, and CrowdShed. As institutional investment in the sector grows, so too will arise more specialized investment vehicles like GLI Finance.
Such has been the swell of institutional interest in the US, that we have even seen platforms actively raising barriers to such investments. As the FT reported, the average time a new loan sits on Lending Club or Prosper is now a matter of seconds. Lending Club has consequently placed a limit on the amount of loans that can be purchased by a single investor. Both Lending Club and Prosper have installed “speed bumps”, designed to give ordinary investors ample chance to scan the platform for opportunities. This is to combat sophisticated investors’ use of computer programs that plug directly into a platform and assess the best available deals in a heartbeat. Renaud Laplanche, Chief Executive of Lending Club, admitted: “There was a little bit of an imbalance that caught us by surprise last year”. Is so great a weight of institutional interest in the US a precursor for how the European situation will develop?
In perhaps another precursory US occurrence, what could be more legitimizing of the Altfinance phenomenon than to see a major bank squirm beneath its shadow? The American bank Wells Fargo reportedly banned its employees from investing their own money via p2p platforms. Their logic for the ban was that such investments represent a conflict of interest for their employees, as p2p sites allow lenders/borrowers to circumvent the banks. Wells Fargo, the fourth largest US bank by assets and largest by market capitalization, deem p2p lending to be enough of a threat that they need take counter-measures against it. That gives you an idea of the scale and growth potential of p2p lending. But must AltFinance be forever seen as diametrically opposed to the banks? That question brings me to the next of my thoughts.
What’s the Evolution of P2P Lending?
A few weeks ago, at the AltFi Summit Sponsors’ Breakfast, I had a conversation with LendInvest Co-Founder Christian Faes about how p2p lending might develop. Whilst it may make headlines to suggest a cosmic divide between the platforms and the banks, the gap between the two may in fact be narrower than most think. Faes clarifies that concept below:
"As P2P becomes a more investable asset class, and gains momentum, there will naturally be more institutional investors that are looking to invest in P2P. It’s interesting, you see this in the US, where Lending Club in particular, have been tapping into the institutional investor base, and they in turn have been securitising the loans. In due course the P2P lenders start to look more like mainstream lenders, and in reality it almost goes full circle."
So how close will certain p2p sites come to resembling traditional lending models? Well, the above-mentioned “speed bumps” of Lending Club and Prosper are to me a sign that even the biggest platforms are reluctant to lose the essence of their being; facilitating exchanges between ordinary people. At the same time, as Faes correctly explains, the more sophisticated they become, the closer these platforms edge towards the structure of a mainstream lender.
Peer-to-Business Lending Taking Off in Ireland?
A number of news items from the past month, coupled with a prediction from Simon Deane-Johns (Co-Founder of Zopa), suggest p2b lending is on the verge of explosion in Ireland. Deane-Johns suggested that p2b lending in Ireland could expand €100m by 2017. Peer to business lending in Britain as a whole grew by over 800% between 2011 and 2013. Deane-Johns believes that growth-potential in Ireland may be even higher:
“Based on what’s happening in Britain, this is easily achievable. Peer-to-business lending could, if anything, grow even faster in Ireland because of the great sense of community between businesses and people here.”
No sooner had the words left his lips than we were breaking the news of another peer-to-peer lender launching in Ireland. Our Money is targeting SMEs, community organizations and charities. Derek Butler, formerly of PwC, is CEO of the new platform, while Sean O’Riordan, once an Associate Director with KPMG, is the Chief Operating Officer. Butler commented of the launch:
“We both wanted to apply our skills to getting money moving in local communities again. For example we will look at helping local GAA clubs who have many local supporters who are prepared to lend them small amounts each at low or even zero interest rates, but need a structured safe way to do so.”
Peter O’Mahoney, Chief Executive of the Irish P2B lender Linked Finance, said of his platform:
“When we started we were doing two loans a week, now it is two loans a day and we’ve had zero defaults and zero late repayments so far.”
Nothing earth-shattering has happened yet, but keep an eye on the Irish p2b scene as the year goes on.
The Autonomy Movement Rolls on
In my last column I explored the emergence of a number of white-label platform providers. These platform-builders provide tailor-made, institution-branded platforms that businesses can incorporate into their website – voiding the need to use a third-party platform. What is the benefit of such a service? A superior level of autonomy. Fundraisers using a white-label platform have full control over any projects they list.
This month we’ve seen a new entrant, Madiston Lend Loan Invest, create a p2p platform that boasts a greater level of control for its users. Lenders can select their own borrowers via a pick-and-bid approach, or choose to allow the automated matchmaking process to work its magic. Borrowers specify their loan amount in £10 increments, and select their repayment period to the nearest quarter. As Tim Simon, CEO of the platform, explained:
“We aim to improve the lending experience by offering the greatest amount of choice to lenders and borrowers, and ultimately keep our users informed at every step of the lending process as they look to grow their finances.”
User control has always been a selling point of AltFinance providers. Now we’re seeing a variety of methods emerge for taking that control to the next level. What’s next in the progression? I think it’s this: p2p borrowers will soon have to express the purpose of the loan they are seeking. The typical criteria through which lenders can currently browse when choosing a loan are largely stats-based – loan size, yield, term, etc. I suspect borrowers will be asked to reveal the purpose of a loan because it will become a key differentiating factor in the decision processes of p2p lenders.
The final trend to note within the sector is the wave of instantly successful platforms that have some association with a relevant and experienced business. LendInvest are a prime example. The peer-to-peer mortgage lender completed the world’s largest ever p2p loan (£4.12m) late in January, and have already completed loans worth over £26m in total. LendInvest were spun out of Montello Capital Partners – one of the leading real estate lenders in London. It is no surprise that the platform have benefited significantly from Montello’s vast experience in underwriting loans, fraud detection, and from having access to substantial deal-flow (between £50 and £100 million each month). But LendInvest are not alone in having been incubated by a powerful predecessor. See below a list of recent AltFinance entrants that were also born of an existing business:
Just a few examples, but you get the picture. These platforms have all been launched by businesses that had already operated as finance providers, but without the p2p element. The platforms launched by these companies enter their respective markets with a prior wealth of lending experience, and that will doubtless see investors flocking to them. And if the investors come, so too will the borrowers. The early successes of LendInvest and Wellesley & Co. exemplify the advantages of these offshoot p2p platforms.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.