2020 has been a challenging year for Swiss digital lending platforms. However, the Covid-19 crisis is set to accelerate technology adoption among SMEs, which will positively impact growth.
The Swiss government's Covid-19 relief programme for small-to-medium-sized enterprises (SMEs) took the wind out of the sails of Switzerland's non-institutional lending platforms this year. "The government's loan program had a strong negative impact on new digital lending volumes" explains Simon Amrein, Secretary-General of the Swiss Marketplace Lending Association. "Many SMEs turned to banks to access the Covid-19 relief programme of platforms, so we did not see market growth figures doubling as we expected. 2020 has probably delayed market development for 12 months."
However, the effects of the global pandemic are not all negative. Digitisation has accelerated, particularly among SMEs that were forced to rethink the way they do business. "In the long run, I believe the events of this year will have a positive impact on digital lending, namely because technology adoption among SMEs will accelerate." Another positive sign to Amrein is the digital lending market's share of institutional investors, which remains stable despite all the upheaval. "It was already high among digital lending to SMEs and consumers, ranging between 40 and 60% depending on the platform. According to many platforms, investors' interest in digital lending remains solid."
Swiss banks starting to promote ecosystems
Covid-19 has compelled Switzerland's major banks to think more about digital lending platforms and ecosystems. In June, UBS launched a new platform called key4, which is open to retail consumers looking for mortgages. Amrein says UBS is just one example. "We see it with Credit Suisse and its CSX platform too, this idea of establishing an ecosystem for banking products has really arrived in the market. Going forward, such ecosystems will also include loans to consumers, companies and public entities."
Pavel Izmaylov, Director and Head of Capital Markets at TMF Switzerland, says there is growing interest from institutionals (especially banks) providing investors with access to the direct lending niche. "Given the low interest environment, some banks are trying to develop access to new asset classes, such as digital lending. Alongside this, we are in discussions on several securitizations of the loan portfolios driven by the institutionals, and several platforms are in discussions with banks about joining forces."
Filling the regulatory and compliance gap
Izmaylov says complying with financial intermediary and money laundering regulations can be a challenge for digital lending platforms. "They're typically set up by entrepreneurs who are very strong in financial technology and the business operating model, but not so familiar with the regulatory aspects. TMF Group is helping to bridge the gap. "We bring the traditional regulatory aspects to their operating model – KYC (know your client) for the lenders and borrowers, transaction monitoring, record keeping and availability for the auditors. This leaves the founders free to focus on their core business."
A critical year ahead
In 2021, Switzerland's digital lending industry has some catching up to do. Amrein sees it as a critical year. "2019's new loan volume was around CHF 470 million. Additional growth is crucial because once we reach a 'critical mass' target level of CHF 1 billion of new digital lending loans to SMEs and private consumers through online platforms, we'll be ready to establish the broader market. We see in more mature, advanced markets how direct lending has become an important asset class, and if we have strong growth in 2021, Switzerland can go through a similar development."
TMF Group together with the Swiss Marketplace Lending Association and Lucerne University of Applied Sciences and Arts will publish a comprehensive Marketplace Lending Report in Q1 2021. To find out when it's available, subscribe to our eAlerts.
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