By Tim Nicolle on Friday 1 September 2017
Yes, Ryan Weeks! Your recent article, "A call for more considered critiques of p2p lending", lamenting the overall quality of comment on the fintech credit sector rings true.
At PrimaDollar, we are fintech credit platform. Although we go against the crowd in many respects, we are all tarred by the same brush. Over this past year, you have kindly published a number of our articles setting out observations on the Fintech lending space. As a market participant, moreover backing the choices we make with our own money, here is a small recap of the main comments that we have made, and some updates where appropriate.
We have four main observations:
We avoided the P2P funding route – see Altfi article: "To peer or not to peer". P2P is a really clever idea, and it is smart for a technology platform to pass on the credit risk in their business to people who have the appetite and skills to understand it and manage it.
At the same time, the opportunity for scurrilous (or even ill-informed) activity is of great concern. Light regulation, lack of history, a potential for misleading marketing and perhaps too much optimism can all combine to offer a systemic risk to anyone relying upon this funding source.
There is also a well-known platform, who, we hear, funded their own equity with P2P loans to the principals; the event risk in this sector remains very high.
A more troubling issue is the size of the market that platforms are attacking – see AltFi article: "Whose lunch are you eating?"
Addressable market space quickly defines the potential of business idea. If the space is too small or too crowded, then no business, however brilliant, has a bright future.
The main concern here is that platforms are fishing in ponds that are too small. Mainstream lending is a low margin business – but lenders into P2P platforms are chasing yield, so inevitably end up focused on narrow market segments where the yield-to-risk trade off works. Breaking out into the mainstream market requires the addition of leverage (see point 4 below) or a breakthrough into the mass market.
I spoke to one of the biggest Fintech players in the UK SME lending space at a conference during the Summer – and his comment, which I agree with, is that there is only room for one or two players in each credit category in each country. Guys – if that’s not you already, you’ve probably missed the boat!
3. Fintech lending: not yet a mainstream product
A real issue holding back the sector and a focus of Ryan’s article is the lack of mainstream take up by customers for non-bank credit solutions. We believe that this is mainly a marketing problem, see AltFi article: "Which side of the chasm are you on?".
New ideas can take a long time to achieve mainstream adoption. Most people do not easily accept new things, new ways of working, new ways of thinking. It is natural human nature to stick to what you know; moreover, financial products (whether lending or borrowing) require a high level of trust.
Overcoming the resistance to change is a major challenge – maybe the biggest one of all. In the end, it is likely to mean that only a few platforms can survive, as only they have the resources, the skills and the critical mass to make it to market acceptability. The fintech credit industry needs to become more and more like the banks that they work alongside.
Increasing the connectivity between platforms and mainstream banks is one of the smart ways to go; this deals with many of the marketing objections that are involved in getting new clients to work with new technologies.
At PrimaDollar we are working on exactly this – watch this space.
Platforms probably need to become principals to ensure long term survival and to add leverage so that they can work with lower margin credit products.
But the regulators fundamentally dislike credit disintermediation and absolutely do not want to allow credit products to be leveraged (increasing the yield available to funders) unless the originator has “skin in the game”; caveat emptor is not enough. See the Altfi article: "Originate to distribute, anyone?".
Many platforms are unlikely to become viable relying upon platform fees alone offering unleveraged credit products (see the addressable market space problem); they will need to become principals (in other words, to build their own balance sheets) and raise debt finance.
But the issue here is that you need substantial amounts of your own equity capital to meet the securitisation regulations or to become a bank – much more capital than typically is committed and available to the platforms themselves. As further discussed with the AltFi Data team – this is not just a matter of disclosure – although disclosure and transparency are necessary steps. The EU and US regulations require transparency AND risk capital before credit can be financed in scale though the capital markets.
Since that article was written, congratulations should be given to the guys at Landbay in the UK for their inaugural debt funding trade in the UK; notwithstanding that benchmark, there are still significant challenges for all the players in fintech credit to find scalable and repeatable funding models that also meet the regulations. In the UK, we also have the worry of the tax treatment of shareholders where equity capital has been provided using the VCT or EIS schemes – so there are many dimensions to these challenges still to be tackled.
At PrimaDollar, as with, I guess, everyone involved in this space, we are passionately committed to building transparent, non-bank alternative credit providers – filling gaps that the banking leviathans are no longer addressing efficiently, and doing so in a fair, democratic, honest and open manner. We have an equity round coming up – so if you are interested in finding out more, please do get in touch.
The fintech credit industry does provide real economic value, helps SMEs and individuals with access to finance (in the UK, or, with our products, in emerging markets). We can offer exciting returns to investors and put cash to work offering good yields to funders.
But there are exciting times ahead as the industry finds its feet.