A small business seeks unsecured financing to expand. It's too small and risky, so the big banks are not interested - but there are plenty of investors who are.
Here is where marketplace lending (MPL) comes in, with online platforms that match borrowers with interested investors, without the need for intermediary banks.
MPL took off in the wake of the global financial crisis. As banks were busy fighting fires in other parts of their balance sheets and withdrawing higher-risk products, businesses had nowhere else to turn.
The MPL model brings innovations to traditional banking on both sides. Borrowers are able to gain access to funds quickly, usually at lower interest rates than the rates offered by banks. In return, investors are able to spread their investments across multiple borrowers (at a range of interest rates), often funding only a portion of each loan, thereby minimising risk.
Unlike banks, MPLs do not accept deposits or lend the funds themselves. Instead, they make money from the fees and commissions received from borrowers and lenders. Once the loan is made, the platform collects the regular principal and interest payments from borrowers and sends the payments to investors, who might be individuals or institutions.
Nimble and transparent lending
The technology behind these online platforms streamlines the online application and analysis process, making the process of originating loans much more efficient. Algorithms can be frequently updated to respond to changes in the market, making MPL much more nimble than the big banks (which are often caught up in more complex risk and compliance processes). By using this technology, data is brought together in a more meaningful way. Meanwhile, investors have greater transparency because they are able to participate directly on the platforms and screen borrowers for themselves. All information is visible within the platform, and continuously updated, so investors can monitor performance and make informed decisions.
Competition or filling a gap?
While some MPLs initially promoted themselves as disruptors in the market, a story of symbiosis has emerged as MPLs help banks to solve a problem on both sides of the marketplace.
At the Annual Global ABS event in Barcelona, Spain, in June, it was discussed that many banks - such as RBS, Barclays and Santander - now actively refer small business customers to MPLs to meet their unsecured finance needs. This is to prevent losing the client's other business, such as mortgages or credit cards, to another bank who may be willing to offer unsecured finance (but only in combination with other products). The MPL meets the client's unsecured finance needs without competing with the bank for other key financial services. The result is a win on both sides.
The outlook for MPL
MPL is growing rapidly around the world, with the United States leading the charge. In 2016, loans issued by MPL platforms represented one third of unsecured consumer loans in the United States, and the market is maturing.
Risk-averse Europe is now starting to take note. Although the market is approximately two or three years behind the United Kingdom, MPL on the continent is now enjoying triple-digit percentage growth. Experts believe that it won't be long before continental Europe is head-to-head with the UK.
Meanwhile, investor confidence is growing as collaboration between banks and MPLs lends credibility to the sector. Investors include individuals, direct lending investors (such as sovereign wealth funds, pension funds and insurance companies) and asset backed securities investors.
A number of MPL securitizations have taken place in the US and in the UK (with more planned in the near future). The very nature of the marketplace model conflicts with being able to rapidly scale a securitization warehouse and get to market, however we do see traction in the MPL securitization space. Although most platforms haven't yet gone through a full cycle, experts believe the MPL platform model will hold up, since many of the investor types would most likely still be willing to invest in adverse times.
Talk to us
TMF Group has been heavily involved in the direct lending space from the outset.
Our services are multi-faceted. We can provide support to a typical syndicated loan through the provision of truly independent, facility agent and security agent services across a number of markets in our 80+ country footprint.
We can also support direct lenders who may be interested in appointing a third party to manage their loan book. We have invested in systems to support agency and servicing, and we are unique as an independent provider of these services, in also providing fund services.
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