The God of online lending is in the detail, not in the “online” or “lending” parts

Slava Solodkiy
Feb 17, 2017 · 13 min read

Read full story in the new issue of Money Of The Future 2016\2017 report

More and more online lending services appear (“Too much of them” as people in USA and China say), they of many types and flavors. There are payday lending (PDL) services, general lending for larger amounts (up to $45K) and longer terms (up to 5 years), student loans, consumer lending (for online and offline purchases), auto loans and mortgages (not many players still), P2P-lending and online pawnshops — and all of them are only available for individuals. We are separately analyzing 5 types of online lending for SMEs. At the same time every service has its focus — some target more reliable borrowers, giving them cheaper (in comparison with banks) loans and loan refinancing offers; some see the segment of people with absent, poor or bad credit history as more perspective, offering them accessible (and usually more expensive) loans. These credit facilities, in turn, may either use their own money for lending or serve as intermediaries for banks or microfinance institutions. If we multiply all the above-mentioned, we will get about a hundred types of online lending.

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The past year put forward the question of lending startups’ refinancing (so they would be able to lend money to ever-increasing client base) as the number of these startups and growth rates of these businesses make them seek for sources of external financing such as credit lines from pension, insurance and hedge funds (which are not able to invest in lending startups directly due to inherently high risks of the latter) and loans from banks with cheap money. In certain cases they also turn to portfolio securitization (when the debt of similar maturity structure and liquidity risk is assessed by external auditors, pooled and sold to investors wholesale as security) since venture financing can’t provide enough money for them. Specialized platforms offering such securities appear and facilitate trading. As far as securitization is concerned, while big players are coping with it by themselves, smaller firms need specialized platforms and funds to act as their intermediaries. Credit portfolio securitization issue (as well as accessibility of long-term and cheap financing sources in general) is crucial for India and Southeast Asia, where the abundance of lending startups and their inability to scale-up to the national level lead to “hen and egg” problem (not enough money as long as there are not enough borrowers and vice versa). Japanese and Korean funds could play facilitating and unifying role if they untie this Gordian knot.

Elevate issued $3.1B worth of loans to its 1.4M clients

USA and China are the two countries, where online lending is highly developed. In China, p2p platforms are most widespread, whereas in the USA there are many balance sheet lending companies. Elevate issued $3.1B worth of loans to its 1.4M clients and was able to extend its credit line by $545M in 2016. Avant lent $3B to 500K clients, sold $255M worth of asset-backed securities and got another $392M as a credit line from JP Morgan and Credit Suisse. Payoff lent more than $6B to its 2M+ clients and attracted in 2016 new rounds of $70M and $46.8M in investments ($300M of investments and credit lines in total). Bestegg issued $1.5M worth of loans in 2015 and sold $205M of asset-backed securities in 2016. Microlending service LendUp, which is operational in more than 23 states already and actively promotes its new credit card, attracted $47.5 M of investments with $0.5B evaluation. Pave (securitized a $300M portfolio in the beginning of 2016) raised an $8M Series A round, Ascend attracted additional $11M.

In other countries, however, lending startups exist and demonstrate high growth rates too, even if there are quite a few of those. German Kreditech raised $11M from IFC and $10.4M from Rakuten, which are seasoned investors with big influence. Canadian Lendful attracted $15M in a new round; Borrowell (which now provides credit scoring and enables to track one’s own credit history for free) raised another $6.4M. In Asian-Pacific, there is something worth our attention only in China. Hong Kong WeLab (under the brands WeLend in Hong Kong and Woladai in China) changed its business model from p2p to b2c lending, raised $160M from Malaysian sovereign wealth fund Khazanah, Dutch bank ING (which provided another $25 M for the development in Hong Kong) and Chinese state-owned Guangdong Technology Financial Group at a $1B valuation. Indian IndiaLends (partners with 30 banks and MFOs) attracted $4M from American Express Ventures. India, Southeast Asia and Australia do not show any signs of forthcoming breakthroughs.

Point-of-sale lending (POS lending) is booming. There are two segments: one for online and the other one for offline sellers. Affirm, working with borrowers under 35, has already shipped its solution to 850+ offline sellers and more than 10 big e-commerce platforms. In round D the company raised $100M ($420M in total). Canadian startup FinanceIt attracted another $17 M (sold its solution to more than 1000 customers). Russian REVO raised $20M (with another $5M in 2015), American BlisPay — $12.75M at seed stage (now they are in a process of raising of similar amount of money), LoanHero — $2.5M ($4.2M in total, integrated with 100+ stores). China Rapid Finance has an interesting strategy: they grow mostly due to numerous partnerships with e-commerce platforms (in such industries as tourism, electronics, games and apparel), focusing on EMMA-clients (Emerging Middle class Mobile Active), however, in order to spread to offline segment, they have opened around 70 offices. The company has got more than 1.2M customers already, announced strategic partnership with Tencent (owner of WeChat, invested in American lending startup Payoff) and raised $90M in total in two rounds of 2016 with evaluation at $1B. Also, this platform doesn’t spend its own money issuing credit — it acts as intermediary between client and partner banks, which couldn’t reach him otherwise. German Kreditech pursues the same strategy (although it credits only online purchases currently).

Online pawnshops have also shown interesting business strategies. They work for two fundamentally different target groups: British Borro (which raised £5.6M of new investments) issues loans to wealthy borrowers secured by art objects (most common collateral), expensive apparel, jewelry, cars, real estate (it accounts for £20M of £200M worth of loans issued); while Philippine PawnHero, on the contrary, issues small amounts to subprime borrowers against goods that can be found on Alibaba (and in case of loan default the pledge can be resold on Alibaba).

Just as in the case with other segments related to online lending, advices on personal finance management and planning, credit history and its improvement are complementary services. The same holds true for online lending. Affirm bought PFM app Sweep, while Payoff and Commonbond integrated with mobile bank Moven with inbuilt PFM functionality. Partnerships among services become more common. Avant has integrated with LoanDepot via API, while student-targeting Credible issues retail loans in partnership with leading online lending platforms such as LendingClub, Prosper, Avant, Upstart and Pave.

Integration with online trading and investment management services is another complementary segment. Such services allow their clients not only to invest money in stocks, but also to lend it on online lending platforms. As an example, Canadian lending service Borrowell has integrated with Wealthsimple investment platform, while American online trading players think about integration with p2p-platforms.

Although the American market flourishes, the problem of having too many players in the market is present. A small startup Vouch, which has raised $10M earlier, is closed, medium-size CircleBack Lending stopped loan disbursement in October of 2016 (“due to the problems with online lending industry in USA on the whole”). In addition, Argon Credit “has faced growing risks”. American Elevate and China Rapid Finance postponed their IPOs to 2017.

Let’s turn back to the problem I have mentioned above: the “hen and egg” issue (sufficiency of both borrowers and funds to lend to them) is gradually turning into the “vicious circle” problem (to attract enough capital one has to be skilled at risk management, which forces one to differentiate on the market not by the price factor but by focusing on the target audience and understanding its behavior). Another problem is “ecosystem presence” (when an attracted client leaves, if not offered any new products).

Investors on these platforms become more pragmatic and they are no longer hooked by the fresh approach of projects, but tend to look more at expected profitability versus potential risks. They also become bigger (the key players in capital deployment through such services are funds and banks), and as a result startups are required to improve their reporting and process management (more expertise in securing loan portfolios, than in innovation in finance). As I have already mentioned, there is a whole new wave of startups (and funds) that focus solely on investing in this kind of services (for example, Russian-American BlackMoon).

A mere idea of a loan marketplace (mediator space between capital holders and potential borrowers) is no longer relevant: you need to be as focused and differentiated as possible: to manage risks better (by means of big data or localization for some specific audience’s needs), or have some unique offer (on specific conditions, pledge or its absence, ways of issuance, specific clients), or the largest amount of money to invest (then again we return to the question of clients number and quality of risk management).

Right now, one can name only three countries, where p2p-lending has become a successful phenomenon: USA, Great Britain and Chinа. USA’s market leader LendingClub ($10,9B disbursed in loans, 1,7M borrowers, 142K lenders), that historically targets the most reliable lenders and refinances loans at lower interest rates, has seen a decline in its growth rates (because of the regulatory pressure) and the stock prices. The company is looking for the new growth drives in business diversification: it attracts new type of lenders ($1,3B from National Bank of Canada) and has launched auto loan refinancing (a $4T market, where only $40B of the total amount disbursed is refinanced). The second largest player Prosper ($5B portfolio), which works with more risky borrowers at higher interest rates, is actively developing complementary products: for example, PFM-service Prosper Daily (former BillGuard) and CreditCard Optimizer startups.

The Chinese market is bigger (both because of the sheer size of the country and the low level of banking services’ availability, which enable online lenders to be more important and affluent here and in fact from the market itself), but also very ambiguous for a number of reasons. First, there is a risk problem: there are around 2000 p2p-platforms and more than 1000 of them neither stand out in in terms of their products nor improve their risk management. It creates a bubble effect of the growing level of bad debt. Secondly, such products are overvalued: they all are Chinese, they work only in China and have Chinese funds as shareholders. What is going to happen when this chain is broken, nobody knows. These players’ expansion to other markets or active fundraising from foreign investors could have given more assurance about their transparency and stability of their growth. The two biggest players are Lufax and JieDaiBao. Lufax, affiliated with a major insurance company Ping An, has $482B in transactions from 234М users and has attracted $1.2В at $18.5B valuation from Bank of China and other Chinese investors to expand to new sectors (for example, wealth management) and has plans for IPO in Hong Kong in 2017. JieDaiBao has raised $380М from Chinese investors at $7.8В valuation, but is also best remembered for the scandal over the naked pictures of its female borrowers accepted as a collateral (10GB of these pictures have appeared online, even some of those borrowers, who paid back their debts on time). The company considers it normal (money do not smell, as they say, if the profitability is high enough). Their success drives smaller players, such as Duarong (has attracted $59М at B round, being valued at $153М), Weijinsuo ($46М round A), Junrongdai ($12M round A) to repeat it. Many of them crash along the way in this race: eSuDai (330К clients), Ezubao (900К clients) and a number of smaller companies are under investigation or closed because of an evidence of them building a ponzi scheme.

In Europe, p2p-lending is not as developed as other online lending segments. Apart from Great Britain’s leading company Zopa (implemented three new types of p2p-loans depending on the borrower’s risks, launched auto loans and mortgage refinancing, published API for external developers and planned to get a digital bank license), we can mention only several players from other countries: France — Younited Credit (attracted a $16,5М Series E round, issued $330М in loans, were expanding to Spain and Italy), Latvia — Mintos (requires to specify collateral at loan disbursement, also works with clients from Lithuania, Estonia, Germany, the Netherlands and Great Britain), Germany — AuxMoney (268,3М euro loans) and Lendico (also developing in Spain, Poland, Austria, South Africa, the Netherlands and Switzerland). In other world regions — Africa, Middle East, Latin America (let’s mention Argentina’s Afluenta) and Asia (Indian LenDenClub) — p2p-lending is not well-developed in comparison to online micro-lending or P2B-lending.

As described above, almost all startups in this field work within the borders of one country, while the necessity to unite lenders and borrowers from different countries is becoming more and more audible. The developed markets (Japan, Korea, Singapore, Hong Kong) are well endowed with money and have low interest rates. The developing economies like India, Brazil and Indonesia are in need of capital (preferably at lower interest rates, which are still high enough for investors from the developed markets). In order to make the movement of capital possible, platforms need to work their way to international expansion and have a sufficient level of trust (brand awareness, sufficiency of the present audience and experience in risk management). Most probably, in the near future we will see the services, which will give people an opportunity to lend and borrow money across borders, leveraging advantages of the best-in-class services in each country.

Online student loans represent another very interesting niche. Such players as Affirm and Credible have already started to expand their product lines to provide not only personal loans, but student loans too. American public company SoFi, a market leader, actively expands its business model to b2c (not only student loans, but mortgages as well) and b2b (Credit Opportunities Fund, created by SoFi, allows institutional and private investors acquire pooled loans from SoFI and other players) segments. The Fund has recently sold a portfolio with AAA rating by Moody’s worth $380M, which sounds like an investment opportunity for pension and insurance funds (which, in turn, would open this newly emerged market to conservative investors).

However, the size of SoFi makes it unwieldy over time — and it opens doors to such players as CommonBond (which has recently acquired PFM startup Gradible), Affirm, ClimbCredit and Earnest (all of them being approximately of the same size). Smaller players follow the leaders — LendKey, Credible and LendEDU, for example, have already launched their student loans’ refinancing programs.

There is a pool of interesting projects focusing on particular needs (and behavioral trends) of some client groups. SelfScore, for example, allows international student to build a credit history in the US by issuing them credit cards — and this is a niche of up to 1M borrowers a year.

Noteworthy, this sector is actively developing only in the US despite the fact that student loans are a burning issue everywhere. Only British Future Finance (has raised $13M in equity and $143M of working capital to finance credit disbursement and expanded to the German market recently), Indian Buddy and Indonesian Cicil (all of them are very small startups) are developing in this field. This is strange considering that people from Singapore, Hong Kong, Japan and Korea spend considerable amount of money for their education.

Great thanks for Stan Vazhenin and Dmitry Solodkiy for their help with this and my other posts. Read more fintech-news and inside Money Of The Future report.

Read full story in the new issue of Money Of The Future 2016\2017 report

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