I recently heard a top notch Chief Lending Officer refer to credit unions as “the original crowdfunders”, which led me to this research. Kudos to the Cambridge Center of Alternative Finance and Booth’s Polsky Center for Entrepreneurship and Innovation for their fascinating inaugural report benchmarking global alternative lending trends. The report is slated to be an annual survey of alternative financing trends. Keeping a pulse on these online trends will help credit unions continue to be fast followers in a highly dynamic and disruptive space. The report is comprehensive in its coverage of both equity and consumer financing however, I found the report relevant for credit unions given that the majority of the volume in alternative finance was focused in the consumer sector and dominated by the US.
Here’s what we can learn from the report:
- The complexity of our regulatory environment and the sophistication of our financial markets fostered a proficient entrepreneurship ecosystem. However, the industry will be challenged to continue innovation without breaking public trust.
- Fiona Grandi, US FinTech Leader for KPMG notes permanent game-changing drivers:
- Lightening speed decisioning and underwriting powered by technology
- Transparency for borrowers (and investors in the case of platform lending).
- Ease of access as new technologies bring lending into the on-demand/mobile app generation.
- Data- Some platforms have re-engineered the definition of credit-worthiness, no longer relying solely on FICO.
- Businesses, long limited by tight credit and declining loan approvals from traditional banks/lenders, are turning to online alternative sources for business loans.
- Globally the online alternative finance industry surged by 212% in 2015 to $36.49 billion with the U.S. representing 99% of the total funding volume. The US also boasts the highest per capita online finance market at $113.43 in 2015.
- In comparing this data to the Federal Reserve’s consumer outflow data, online alternative finance consumer lending represented 12.5% of traditional consumer lending.
- In contrast to our global neighbors, between 2013 -2015 the majority of business and consumer loans were funded by institutions in the United States versus individual investors in other countries. Branding themselves as “hybrid” funders could give credit unions an entry point into this market.
- Not only is the US the largest contributor by volume, we also drive product innovation, model diversity and number of active alternative platforms.
- Several factors might contribute to the success of these alternative finance markets in the US:
- Comfort with online retail and e-commerce activities
- High smart-phone penetration
- Early adoption of alternative finance models
- An investment climate prone to support and fund technological innovation
- A culture of innovation in the financial services sector
- Strong adoption of online/mobile banking
- Dissatisfaction with traditional banks (often resulting from restrictive lending policies)
- Pent up demand from unbanked and underbanked consumers and businesses
- Platforms tend to concentrate on the East and West coasts of the country. The highest concentrations of platform headquarters are in California and New York.
- The online marketplace is dominated by personal and consumer lending in the US, although business fundings are rapidly growing. It is suspected that a portion of these consumer loans are taken out by small business owners to finance operations which could indicate an area of opportunity.
- In 2015, the average consumer loan size on marketplace/P2P platforms was $24,683.
- Innovations in credit scoring models for consumer focused marketplace/P2P lending may be hampered by fair lending laws which prohibit use of demographic and other data that could reveal age, gender, race or other protected traits in the credit underwriting process.
If you’re interested, I encourage you to keep a lookout for the 2017 report which should come out in the next couple of months and to read the inaugural report, which can be found here: https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2016-americas-alternative-finance-benchmarking-report.pdf
Defining the terms:
As the report points out the term “alternative finance” means different things to different people so they provided a helpful guide and I’ve added the percentage that each model represents of the total 2015 volume as a point of reference:
“Working Taxonomy of Online Alternative Finance Models”
|Alternative Finance Model||Definition||Percentage of 2015 Total|
|Marketplace/P2P Consumer Lending||Individuals or institutional funders provide a loan to a consumer borrower.||71%|
|Balance Sheet Consumer Lending||The platform entity provides a loan directly to a consumer borrower.||8%|
|Marketplace/P2P Business Lending||Individuals or institutional funders provide a loan to a business borrower.||7%|
|Balance Sheet Business Lending||The platform entity provides a loan directly to a business borrower.||6%|
|Marketplace/P2P Real Estate Lending||Individuals or institutional funders provide a loan secured against a property to a consumer or business borrower.||2%|
|Real Estate Crowdfunding||Individuals or institutional funders provide equity or subordinated−debt financing for real estate.||2%|
|Invoice Trading||Individuals or institutional funders purchase invoices or receivable notes from a business (at a discount).||2%|
|Equity−based Crowdfunding||Individuals or institutional funders purchase equity issued by a company.||1%|
|Reward−based Crowdfunding||Backers provide finance to individuals, projects or companies in exchange for non−monetary rewards or products.||1%|
|Donation−based Crowdfunding||Donors provide funding to individuals, projects or companies based on philanthropic or civic motivations with no expectation of monetary or material return.||0%|