Wandering towards the elevators on the morning of the 14th of April, 27 floors high in the Marriot Marquis, a steadily rising buzz of activity comes spiraling upwards from far below, reverberating way off into the concrete rafters. It is the sound of some 2,500 people, come from every corner of the world. It is the sound of 2,500 people who have come to celebrate, explore and build upon a revolution in lending.
With 5 tracks running concurrently – from Main Track to company demo to the newly furbished “China Pavilion” – the array of content on offer at LendIt was supreme. And as such I can’t possibly hope to provide an exhaustive summary! But below you’ll find my impression of the conference’s most engaging themes – as well as an eclectic mishmash of noteworthy takeaways from a selection of the many meetings that were staged over the three day event.
“Where are we now?” Asked Prosper’s Ron Suber in the closing keynote of Day 1. The answer? Slap bang in the middle of when a movement transitions from an interesting new niche to a “great idea”. The question that Ron posed, and that many at the event echoed, was how do we move on towards the fourth stage: “can’t live without it”.
Many of the event’s most gasped-at announcements were geared around providing the answer. Huge amounts of money are being raised and extraordinarily high profile partnerships are being struck – all geared primarily around driving scale. Renaud Laplanche kicked off the event with a bang by announcing a newly forged partnership between Lending Club and Citi. CAN Capital blew us all away by announcing the securing of a $650m lending commitment in a deal led by Wells Fargo Capital Finance.
There was much discussion around how and when point-of-sale transactions will take off. Such deals could be critical in dragging the industry into the makeup of daily routine. Lending Club’s prototype of an answer – “the Cube” – was received with rapturous applause. The little red box has been designed to sit in the stores of retailers – poised to deliver its customers with funds for making a purchase at a moment’s notice.
How do we become ubiquitous? Another of Ron Suber’s trademark question-and-answer offerings. He outlined the coming challenges and elucidated his means of weathering them. He also presented an updated list of “Big Hairy Ambitious Goals”. They were: uniform pricing standards across the space, an AA rated tranche, a multiple agency rated deal, capital treatment, a listed, P2PGI-like vehicle in the US, a top 10 bank partnership (by which he means a top-to-bottom integration), mainstream adoption and $20bn’s worth of origination in a single year.
The final point here is that we’re not yet essential/ubiquitous/mainstream. We’re still clinging to the relatively early stages of a hockey stick growth curve. Indeed, I met at least 10 attendees who were at LendIt in order to gauge the feasibility of establishing a platform within an underdeveloped market. But as Peter Renton told us on Day 1, quoting James Dimon – CEO of JPMorgan Chase, from a letter that he recently circulated to shareholders: “Silicon Valley is coming”. The lending industry has changed forever and that change is irreversible.
The event was based int he US, but it was not US-centric. Every continent on earth was represented by a platform. For me, discussion of the Chinese market stood out within the schedule. Many industry observers are vaguely aware of the size of the market, but I’d wager that very few (prior to LendIt, that is!) were familiar with the sector’s sophistication. This is by no means the Wild West of lending.
The market is home to 1,575 platforms, to a total loan volume of $41.3bn, and to 1.2 million individual lenders. It is a market founded on the retail customer. Average loan terms within the space level out at around 6.1 months. To name but a few of the mammoth operators: CreditEase, Dianrong, Lufax and China Rapid Finance.
So what did I learn about this distant frontier of lending?
On regulation, Greg Gibb of Lufax assured the audience that a dedicated regime is inbound, and that he and other platforms will welcome its arrival. On the nature of that regulation, Greg doesn’t envisage UK-style stipulations (such as capital requirements) having a marked impact upon the industry. The much more impactful move will likely relate to stamping out a prevalent mismatching within China of duration and risk/reward. Some platforms will currently sell a 2 or 3 month product as though it were a 3 year investment.
Wealth management. This is an important part of the Chinese market. Ning Tang of CreditEase – the first platform to venture down this route – says that it’s all about simplifying the lending proposition for retail investors, who will often lack the financial nous to implement their own investment strategy.
The Chinese platforms lead the whole world in terms of their engagement with mobile devices. A staggering 50% of Lufax’s transactions are mobile. By the end of next year that figure could well be 70%. According to Lufax, the mobile market also has a pronounced impact upon referrals. It is extremely easy – natural even – for a satisfied customer to recommend a service to a friend after having accessed that service via mobile.
CreditEase has been working to establish a P2PFA-equivalent in Beijing – an entity designed to ensure that a greater level of self-discipline pervades the Chinese sector. Broadly speaking – this is a much more progressive market than it gets credit for.
The second imagination-moving thematic strand within my broader “going global” theme pertains to international expansion.
We heard both fervent enthusiasm and firm counter-thrusts on the subject. Partel Tomberg of Estonia’s Bondora – which already facilitates cross-border investment across Europe – believes that the continent needs to be treated as a singular market if local platforms are to have any chance of going up against the likes of US giants Lending Club and Prosper.
Noah Breslow of OnDeck offered a word of caution on international activity. Banking, regulation and access to data each varies enormously country-to-country. Opening in a foreign market cannot be undertaken in cavalier fashion. It requires a great deal of legwork. Noah pointed to organic growth, acquisition, licensing and partnership as existing examples of delivering a cross-border strategy.
Finally, an audience member asked Renaud flatly: are you going to expand internationally? The answer was: “yes”.
With so many partnerships having been announced at the conference, the benefits and impact of such arrangements served as an obvious and recurring talking point throughout the three days.
Panelists were in almost universal agreement that the shift away from the “us vs. them” mentality with regard to the banks is now more or less complete. The benefits of a bank of tying up to an online marketplace lender were often cited. Such partnerships are increasingly valued by the banks themselves in that they allow those banks to grow their loan portfolios within a new and profitable asset class. Alliance Partners described unions of this kind as something of a no-brainer; they allow the banks to deepen and broaden customer relationships by saying “yes” to a new group of borrowers.
How about institutional investment partnerships? The asset allocation panel was outfitted with a group of speakers who collectively boast just shy of a billion dollars deployed within the marketplace lending arena. The managers on show outlined the various methods through which they are able to derive alpha. One such example is that a few of them retain exposure to 2012/2013 vintage loans – loans that carry considerably higher interest rates than are available on most platforms today.
In terms of building a relationship with an institutional capital provider – there were lots of takeaways. The broad picture is that the process can be rather onerous – as you might expect. Market regulation is a vital consideration when purchasing institutional-grade loans. We learned from the asset allocation panel that part of the lure of the UK market is the singular regulatory clarity attached to the process of lending to consumers. Less so in the US, where the rules vary from state to state.
Unsurprisingly, the point that institutions are looking for finance-first management teams was also laboured. Don Davis of Prime Meridian Capital Management made the point that Prosper had to make the transition from a technology-oriented company back in 2013 into a fully-fledged financial firm. “It used to piss me off!” Bemoaned Don, referencing Prosper’s now-former policy of shutting up shop on New Year’s Eve (a critical day in the accountancy calendar).
Just a brief note on the internal infrastructure of a platform. I felt that I learned a great deal on this topic throughout the course of the event.
From the outset we heard some of the industry’s largest platforms expound about how important the optimization of internal processes is to firstly achieving and subsequently managing the effects of rapid scale. Prosper CEO Aaron Vermut told of how the platform’s turnaround required the fresh installment of a host of senior employees, vast changes to loan servicing platforms, to data storage techniques, and so on.
A large proportion of these discussions were centred upon the subject of automation. Renaud Laplanche described automation as decreasing the risk of human error, as driving increased transparency and as contributing to an all-round better delivery. Indeed, Lending Club is always looking for technologies that will allow the platform to automate repetitive manual processes. It’s for that reason that Lending Club will hire 30% more engineers than operations people in 2015.
Automation also ties into credit modeling, but that all hinges upon whether an appropriate supply of Big Data is available within a particular market. There were a host of data providers on show at LendIt. One especially eye-catching example was Tencent Tenpay – China’s leading online payments platform. A huge number of people in China that are financially active are not covered by the credit bureau – in other words there’s no standardized set of credit data available about them. Tencent and its 800 million users have stepped into the breach. Those users leave an enormous digital footprint on the platform – and many Chinese platforms are able to harness that information in order to make informed lending decisions.
Onto the meeting moments…
Craig Moore, Founder and CEO, Beehive:
With no Credit Reference Agency information available to Craig and the UAE-based Beehive team, the platform is forced to work closely with each prospective business borrower and scrape as much granular data as possible. The sort of data that is usually packaged up into an Experian or Equifax credit score. Over time, Beehive will inevitably accrue a valuable and unique set of credit data for UAE’s small business community. An intriguing side-project for this lending-first business.
Michael Slavin, Founder and CEO, Privlo:
I asked Michael about international expansion. He told me that he estimates the size of the addressable opportunity for real estate lender Privlo within the States to be worth $100 billion. As such, no need to look overseas just yet!
Glenn Goldman, CEO, Retail Capital:
Glenn posed the following question to me: with so many institutions queuing up to buy loans within the alternative finance space, why aren’t some of the originators selling those loans at above par? We’d love to hear our readers’ thoughts on this one! How would such an action take place – via an increased facilitation fee? And would an institutional investor ever accept such terms?
Chris Ganan, Co-Founder and President of Capital Markets, Asset Avenue:
Chris also subscribes to the notion that the addressable opportunity within the US real estate space is sufficiently large not to think about international expansion for now.
Dan Miller, Co-Founder and President, Fundrise:
Dan Miller, on the other hand, is already actively exploring opportunities within the UK market. Fundrise has lent around $80m to property developers so far. The platform also stands out within the US in that it is only around 30% institutionally funded, the remainder of its capital sourced from a mixture of retail and accredited investors.
David Snitkof, Co-Founder and Chief Product Officer, Orchard:
I asked David whether he felt, given all of the innovative infrastructure springing up around institutional investment, that Orchard now faced a much more competitive market. He told me that whilst there are companies that overlap with some of Orchard’s offerings (monitoring, selection tools, etc.), there is no other business that provides quite the same range of products as Orchard.
Justin Zawaly, Chief Growth Officer, The Business Backer:
Two interesting points here. The first is that The Business Backer (TBB) is a lender/aggregator hybrid. Justin told me that out of a 100 quality leads, TBB might fund 75% of them off its own balance sheet. The remaining quarter are forwarded onto platforms that are better positioned to provide funding than TBB, in exchange for a referral fee, making every lead count. The second point of interest is that Justin – going somewhat against the grain of the event in general – doesn’t subscribe to belief that automation can ever entirely replace human interaction’s place in the lending process.
Brock Blake, Founder and CEO, Lendio:
Lendio is a Funding Centre-style navigational tool – operating in the States and showcasing the best of the US alternative business lending scene. The platform has a partnership in place with Staples and is offering access-to-credit assistance to its millions of SME clients. Powerful stuff.
Jason Fritton, Founder and CEO, Patch of Land:
I found this particular point fascinating. Jason spoke of the importance of selling a story when trying to fill a real estate loan on the Patch of Land platform. Indeed, one of the most tempting facets of an international expansion to Europe is that the romanticism of investing in a property in, say, the South of France, would – according to Jason – be a strong hook for investors.
Jeff Knott, Vice President, Equifax:
Quite simply, Jeff told me – and he’d know better than most – that there is a greater breadth and depth of credit data available today than at any other time in the history of lending. The challenge, of course, is making use of that data in innovative and effective ways.
Returning once more to that din that echoed upwards through the Marriot Marquis on Day 1 of the conference. It reminded me acutely of the crescendo of noise that was famously attached to the awe and mystery of the monolith slabs found throughout the universe in “2001: A Space Odyssey”. Those monoliths signaled the advent of a new phase in human evolution. Just something that played upon my mind each time I heard the rising hubbub of LendIt USA.