By Guglielmo de Stefano on 9th December 2015
No matter if you are an investment manager, if you run a big manufacturing company or a small bakery, diversification will be key for your business. Members of the online lending industry might achieve diversification through a wide array of methods. Platforms might choose to target new types of borrowers with different credit profiles, companies of different sizes, or they might lend money in different parts of the world. Among the available methods of achieving a diversified customer base, geographical diversification appears to be among the most challenging.
During the last couple of months, I have been interviewing many influential worldwide players of the space and apart from focusing on recent updates, I have asked all of them about their potential plans for expanding their businesses abroad and the best possible strategies for accomplishing this task.
"Though we're based in Michigan, we lend in all 50 states, and our customer base spans a wide cross-section of industry type, business profile, creditworthiness, and geography. […] International expansion isn't on Credibly's radar right now. We're completely focused on serving the 28 million small businesses within the United States."
“Early in 2016, Bigstone will launch a working capital loan funded by marketplace investors. We expect our second working capital funding to have rapid uptake with small business advisors, brokers and other channels. “Once we have demonstrated the power of our market funding and proprietary risk-based pricing we intend to expand first in Australia, followed shortly by growth in adjacent Asia/Pacific markets"
What emerged was pretty interesting and two crucial points stood out. According to the majority of platform representatives, expanding beyond their national borders doesn’t seem to be a priority at the moment and even if some online lenders are looking at other markets, they tend to prefer to explore new local horizons in the short term, often by forging new partnerships.
In my opinion, there are a few likely reasons for this trend.
First and foremost, the fact that platforms are reportedly planning to keep operating in their native countries could be due to the young age of the industry and of the majority of platforms. In other words, there are tons of profitable opportunities that haven’t been exploited locally yet and going abroad doesn’t seem to be worth the complexity. Indeed, apart from a few exceptions, most of the platforms are less than 5 years old and public awareness (wherever you’re operating) around this nascent industry has not yet reached its peak.
Going abroad is no easy task. It requires a thorough analysis of the territory under conquest. Platforms aiming to expand internationally need to fully understand the differences in regulatory approach, the market’s dynamics, major local players and the availability of credit data.
However, some global players have admitted to thinking about moving further afield and are in the process of targeting new markets. According to a selection of such pioneers, three crucial factors have to be taken into consideration: setting up new offices abroad, acquisitions of existing companies and partnerships with local businesses.
The first one is a pretty tough method. Setting up operations around the world entails satisfying all of the requirements listed above, plus extra costs, such as overheads, taxes and the like. However, there are a few existing examples.
One is RateSetter Australia, launched in October 2014 by former investment banker Daniel Foggo, after Rhydian Lewis first founded the company in the UK in 2010. Further examples include Thincats Australia, born from a joint venture with ThinCats UK, which holds 25 percent of its shares; and OnDeck Australia, which is reportedly set to launch a new operation in Australia in the new year.
The second method is expanding internationally by acquiring new companies. We’ve recently witnessed the first major piece of M&A activity, when Funding Circle acquired Rocket Internet baby Zencap. Through this deal, Funding Circle has moved into Europe, expanding its services into Germany, Spain and the Netherlands. I very much doubt that this first M&A event will be the last, but I am quite sure that entering new markets through the acquisition of existing companies is an expensive and diligence-intensive process, and one that in this particular space is fraught with valuation issues. The vast majority of businesses in this industry are not listed, creating a level of uncertainty, and uncertainty (or, rather, hype!) sometimes leads to lofty valuations that could represent barriers to global M&A activity.
Last but not least come partnerships, which seem to be the most popular way of breaking into new markets, for various reasons. Partnerships are relatively cheap, and allow platforms to expand their customer bases without incurring high costs and risks. Forging new partnerships is a powerful way to cross borders, allowing both parties to benefit from some upside, such as increased loan origination volumes, containing fixed costs, relying on more experienced partners, and limiting the downside. The flip side, of course, is that the upside is partially limited too.
There are many examples of such partnerships globally; from local ones such as the agreement between Credibly and the Small Business Association of Michigan, to international tie ups such as the Pacific region joint venture created by the Australian platform Bigstone Capital and the Interface Financial Group (IFG).
One question remains at the forefront of my mind – when the industry moves from its early stages to the shakeout phase, will partnerships be enough to stay ahead of competition? Will the industry witness many more examples of M&A activity, rather than further collaborations, as the resources of the major players swell?
Frankly, I do believe that in the consolidation phase, the leading platforms will surely take into consideration the option of international expansion and they will likely accomplish this via acquisition. Minor players will either be acquired or directly edged out of the space by the competition. The cooperative spirit that now permeates the global alternative finance industry will suddenly disappear and the only air that will be left to breath will belong to the sector’s leading lights.