Over the past year the Canadian average debt (consumer level, outstanding balances) has gone up 2.9%, but the 90+ day delinquency rates are down 3.7%, according to a recent Equifax report. Canadian debt to income ratio is at an all time high, 163%. The report also indicated that national consumer demand for new credit continues to increase. There is obviously great demand for credit and credit refinancing and so there is significant demand for marketplace lending in the consumer space. The low level of default is also positive for potential investors in the space. On top of this, the size of the credit markets in Canada is not insignificant – about 12% of the size of the US.
I caught up with the three main marketplace platforms in the country to get their perspective on the growth of the industry and where it will go from here.
FundThrough: a small business marketplace lending platform officially launched in February this year
Borrowell: a recently launched consumer P2P platform
Marketplace lending in Canada is lagging behind the US and the UK. This is partly due to the unique banking system in the country. There is an oligopoly with five big banks operating and dominating the market. Credit is widely available but it is a market dominated by a few big players who last year earned a combined $31.7 billion in profit.
“We haven’t seen any innovation in the financial sector for years.”
This is a very different model from the US where there are thousands of banks, from the big banks to smaller community banks, and so it is usual for consumers and businesses to shop around for the best deal and use different banks for each product needed. Whereas in Canada people tend to stay with one bank for all of their financial needs. However, since global coverage of FinTech companies has increased the demand for a broader range of financial options from Canadians has increased.
“Younger people are more willing to change and want more options.”
The banking system has been compared to the Australian market, where four big banks are dominant. In Australia we are also seeing an emerging group of alternative finance platforms. Kevin Sandhu, CEO of Grouplend, said that personal loans aren’t a common concept for middle class Canadians; people are more likely to borrow against their house if they have the means to do so, otherwise they are typically left to carry balances and their credit card where rates are very high at about 20%.
Another reason for the slow development of marketplace lending is that the Canadian financial system weathered the most recent financial crisis reasonably well. None of their banks needed bailing out and so there was little demand for an alternative system and no narrative impetus for bank alternatives.
“People thought that it was good Canadian banks were more conservative in their approach to extending credit.”
“Canadians are proud of how their financial institutions rode the financial crisis.”
But similar to in the US and the UK, investors are looking for yield in a low yield economy and this is something that marketplace lenders can offer.
When asked about whether they think that a US platform may expand into the fledgling Canadian market, there were some differences of opinion. Many thought it was unlikely, citing cultural differences between the two countries as one of the main factors, but others thought US players were likely to look to Canada as an option for expansion. FundThrough highlighted the example of Target, the US chain store, which tried to expand into Canada. In its first year of operation it lost $1 billion and in January this year announced it was closing all stores in Canada. It now stands as a cautionary tale to American companies that think it’s simple to expand over the border, making the mistake of assuming Canadian consumers are the same as American consumers.
“People have a fondness or an association with a bank in Canada. In the UK if a bank rejects your loan they must provide you with a list of alternative options, but there is nothing like that set up in Canada. One of the big problems is that if people are rejected by their bank they don’t know what their alternatives are and so the platforms have an educational role to play as well.”
One development that would help the industry’s growth is the involvement of the banks. For example in the UK both Santander and RBS have a scheme in place to refer unfunded businesses to Funding Circle. The Canadian banks may see the benefit of getting involved and partnering with the industry. The platforms can work in tandem with the banks taking on borrowers who don’t fit the banks’ criteria.
Kevin Sandhu said that he is “very optimistic that banks will start to partner with platforms and that these partnerships would make a lot of sense.”
In Canada regulations on the space are still unclear. The regulators are currently looking at the space and waiting to determine what the regulations will be. Currently, only a limited number of accredited investors are allowed to invest. But many are optimistic that over time the regulatory environment will change and retail investors will be able to be involved. This is at least a year or two away.
“By the end of 2015 I hope that peer-to-peer lending will be as mainstream in Canada as it is in the US or UK.”
This is certainly an optimistic outlook and it is clear that the marketplace lending space in Canada has huge growth potential. The financial market is ripe for disruption and the incumbent banks are not taking steps to start innovating. However, much education will be needed for consumers and businesses to break with their traditional financial habits and see the benefits of the alternative structures.