Smart Lenders' Jerome Camblain gazes into the crystal ball as what the next 12 months could bring the fast-growing but under fire sector.
2019 saw the larger US consumer loans platforms approach profitability. Nevertheless, despite a larger loan production and better operating margins, the listed online marketplaces did not witness a positive evolution of their stock price. This does not fare well for new capital venture infusion for smaller outfits, unless they can demonstrate that they either serve a particular profitable niche or that their loans origination special sauce produces a strong net return.
It does in no-way negate the utility of this new “debanked” channel of loan origination for both borrowers and investors. It only adds a little pressure to grow the business with a direct aim at profitability and adapt to the new environment. Here are possible changes to be followed in our industry:
In 2019, the stakeholders discovered that online lending is a financial business with a tech architecture and mindset, not the other way around. We saw a lot of hiring for the strengthening of the credit process among the platforms.
As the credit improvement has happened, 2020 will see a tech investment challenge affecting the smaller players, as moving from originating USD 30-70m in loans per annum to USD 300-500m requires a much stronger architecture and no more manual fudging. Not all platforms will be able to fund this up-move as venture capital has dried up after the few IPOs performance of the sector.
Consumer credit in Europe is a tough business as rates are very low due to intense competition by incumbent credit providers and uneasy access to borrower’s information, protected by privacy laws.
Small business loans by contrast will be taking off, mostly in countries where banks are reducing their lending appetite due to capital cost and regulatory constraints. This trend will accelerate, allowing a unique opportunity to deploy capital towards this market segment, away from other crowded private debt markets such as larger deals, Infrastructures, renewables, LBOs and other sponsored deals. Caution will be required as platforms and borrower’s quality vary a lot. Each market has its specificities and local expertise is key.
As the market size grows and the processes mature, more institutional capital will be attracted to the opportunity. Direct investment by non-specialists is proven difficult for many reasons such as costs and expertise of due diligence process, tax and legal opinions on the platforms and the loans acquired, statistically relevant minimum size and multi-vintage mix, credit scoring methodology and execution process, back office issues about position checking, daily cashflow monitoring, performance tracking… For all these reasons, investors will seek the support of the new asset management industry that provides expertise and size and cost mutualisation.
The main US platforms already compete for the traditional/average prime borrowers. Newcomers will need to develop sharp marketing skills to find the profitable underserved niches, keeping in mind that lending is a delicate balance between charging enough to compensate for defaults and not charging too much to generate defaults. A long-term vision much needed for fair lending.
Artificial Intelligence and Machine Learning will become automatic features of platforms credit scoring and asset managers selection process. Indeed, as data is widely available, AI is THE tool to improve performance as volume grows. There might be no short cuts to experience, but there is intelligence to be gained from improved data treatment.
6) ESG – Environment, Social, Governance
Investors worldwide are under pressure to deliver results, but more and more within a new environment and social guidelines. As lenders do not control the loan origination process, they will have to impose to marketplaces to join the move, by signing the UN PRI principles or the UN Global Compact ones, offering the guaranty to lenders that all small business loans comply.