Background – “network lending”
Examples: Lending Club, Iwoca, Ezbob, Capify, Liberis, Neyber
Network lending is a term I use to refer to instances of online lending platforms plugging directly into existing, transaction-based online infrastructures – like payment platforms or accounting softwares. Alignments with these kinds of networks bring two major benefits to lenders.
Firstly, lenders stand to boost origination flows by tapping directly into an existing customer-base. These customers will already be comfortable interacting with financial services online. They may therefore be more open to testing the water with online funding solutions. More important, however, is the fact that these solutions are seamlessly accessible online, and available at the point of need. Take the tie ups between Lending Club/Iwoca/Ezbob/Capify and Alibaba as demonstrative. Each of these four platforms is plugged into the Alibaba e-commerce network. The purpose of these arrangements is to supply point-of-sale finance to small business owners who wish to purchase from Chinese suppliers via the Alibaba network – which is the largest e-commerce marketplace in the world. Access to funding for these businesses is just a click away.
The second major benefit in network lending – and the deciding factor in quickening lending decisions – relates to the availability of credit data. Lenders are able to pull large amounts of information on loan applicants via network integrations. This wealth of data is the fuel that powers cutting-edge credit processes such as tightly targeted digital marketing, auto-decisioning, big data analytics, machine learning, and so on. Merchant cash advance provider Liberis, for example, is currently shifting towards a more technology-oriented credit process. The platform’s integration with payments giant Worldpay is key to that transition, opening up pre-decisioning options while also allowing Liberis to price risk more effectively.
UK-based employee lender Neyber announced its official launch in January of this year, at the same time announcing a £6m Series A funding round. Neyber allows employers to offer affordable loans to their employees. The platform's loans are repaid using an innovative salary deduction mechanism, which is integrated seamlessly into an employer’s payroll systems. The platform believes that the resulting lack of friction in the repayment process will translate to significantly lower defaults. Neyber already has partnerships in place with Police Mutual and Staffcare.
But tie-ups of these kinds are just the start. The future is for online lenders to structure their activities around their own bespoke infrastructure. That means not merely partnering with a network, but building a network.
The next wave
Examples: Satago, Sonovate, PayPal Working Capital
The next big thing in alternative lending is to offer both infrastructure and funding solutions to customers. Recently launched invoice finance platform Satago is a prime example here. The platform went live in early June, announcing a £4.6m fundraise – comprised of a £3m credit line and £1.6m in equity.
Satago blends selective invoice financing with a free “credit control” platform for SMEs. This credit control platform essentially boils down to a means of allowing customers to keep close tabs on the state of their cash flows. Clients can “visualise credit risk from their sales ledger” via a seamless link between the Satago platform and whichever online accounting software they use. The credit control platform is free to use. Should a customer spot an impending rough patch, Satago can offer a “near-instant” financing solution. The close integration between Satago’s cash-flow management platform and the client’s accounting software package – and the data provided by that integration – is the driver of these near instantaneous funding decisions.
I wrote a column in March entitled “A tale of two credit models”, in which I attempted tease out which were the truly innovative aspects in the credit engines of short-term business lenders Liberis and MarketInvoice. Steven Renwick, the CEO of Satago, left the following comment on that article: “At Satago we started by building a fully-fledged credit control platform before building the invoice finance product which enabled us to train our risk engine on over 2 million invoices representing nearly £1 Billion of paid invoices. Because of that we were able to start with our risk model already nearly completely automated - which is important for us as we can finance invoices as small as £500 - which would not be possible at scale if we were having to manually check every invoice.”
Satago is not alone in having taken a “plumbing-first” approach. Sonovate is a similar sort of beast, but one tailored to the contract recruitment sector. The platform provides agencies with contractor management software, easing their administrative burden through automation. Should one of these agencies require funding against an outstanding invoice, Sonovate is ideally placed to step in. The company closed a £20m funding round in January of this year, comprised of £5m in Series A money and a further £15 million in debt funding from Shawbrook Business Credit. The Series A round was led by Dawn Capital.
Then there are the established networks that have wised up to the lending opportunity. PayPal has been perhaps the fastest to capitalise. PayPal Working Capital has lent over $2bn to over 90,000 businesses across the UK, US and Australia since launching in the US in 2013. The company is able to draw on a customer's sales history data to fuel rapid lending decisions. There are no external credit checks for loan applicants, and funding can be approved and issued within minutes. Repayments are automatically applied as a fixed percentage of a company’s daily sales, in the style of a merchant cash advance. Business owners have a say in fixing that percentage prior to drawing down funds.
In each of the above examples, the financing solution itself takes on a kind of “behind the scenes” role. Credit is available at a moment’s notice, without obstacle, at the very point of need – in much the way that one draws water from a tap. The lenders themselves possess a level of ubiquity within their chosen niche, which all online lenders strive for.
Have existing players missed the boat?
Not by any means. There are still plenty of “behind the scenes” opportunities up for grabs. CommonBond recently acquired personal finance platform Gradible, which provides users with personalised recommendations for how to better manage and pay off student debt. CEO David Klein tells us that the acquisition will allow CommonBond to break into the 401(k) student loan market. The 401(k) program allows employers to contribute to student loan repayments, up to a level of their choosing, as a form of employee benefit. Klein says that, while only 4% of companies in the US today contribute to paying off student debts for their employees, that figure is poised to grow to over 26% (according to a recent Willis Towers Watson survey). The acquisition of Gradible will allow CommonBond to insert itself into this process, and to charge a nominal facilitation fee to companies.
One might well argue that CommonBond’s entry into the 401(k) market is more reminiscent of the “network lending” tie-ups – between the likes of Liberis and Worldpay. But I’d argue that CommonBond’s decision to bring the Gradible platform in-house will result in an even tighter integration. Of course, there’d be no value in the acquisition if Gradible were to become bias towards CommonBond, but we’re told that it will retain its objectivity, referring students to CommonBond but also to a range of other options, including federal government programs. If all goes according to plan, CommonBond may become the kind of quiet enabler that puts up loud lending numbers.
CommonBond announced a $30m Series C last week, while also securing over $300m in loan purchases from a global asset management firm. To my mind, it’s no coincidence that many of the industry’s recent fundraises have revolved around lenders that have pursued network lending/behind the scenes strategies.
Each of the platforms featured in this article is providing funding to customers as part of a broader financial services package. Some have inserted themselves into an existing package through partnership. Others have fashioned their own financial services infrastructure, where access to funding is but one part of a broader offering. In both instances, the prize is becoming the fuel that makes the system go – a funding source that is taken as a given by customers, like water running from a tap.