A decade of prosperity
It has been almost a decade since alternative lending start-ups burst onto the scene. Their emergence, reinforced by the financial crisis, provided those largely ignored by banks – individuals as well as small businesses – with capital necessary to fulfil their endeavours. Lending to SMEs has particularly flourished over the years – willing investors have provided ample funding to service the ever-increasing demand from small businesses, with online lending platforms facilitating the process.
Industry pioneers have introduced innovative technologies, using unique algorithms to provide creative and customised products to SMEs. Lending Club and OnDeck, two leading marketplace lenders in the US, took another major step in 2014, when they both went public after their respective IPOs. Meanwhile, the triumphs of the first wave of alternative lenders have inspired a multitude of other start-ups around the world, that now offer a wide range of small to medium term loan products. Loan volumes have grown in impressive fashion over the years; every year marketplace lenders facilitate loans worth tens of billions of dollars to SMEs globally.
Changing tides on the horizon
This year, however, events took an unfavourable turn. With major US players having faced a troublesome first half of the year – including Lending Club’s scandal involving unfair/illegal lending practices, leading their CEO to resign – investor confidence has started to wane industry-wide. While demand from SMEs for loans is still high, there’s been a lack of supply from investors lately (meaning that marketplace lenders can’t satisfy the strong demand for loans).
Although rising interest rates have helped somewhat to get investors back on-board, general investor confidence seems to have been damaged and the industry’s growth rate in the last year or so has failed to match expectations.
Regulators: friend or foe?
The restrictive regulatory approach of the US towards the FinTech industry, with regulators increasingly calling for greater oversight of the online lending arena, doesn’t help growth prospects either. The Federal Reserve, the Federal Trade Commission and the US Treasury Department have all announced plans to scrutinise alternative lenders, with the likely intention to introduce new regulation for the sector.
This is in contrast with the UK’s active approach, where regulation is aiming to support rather than manage alternative lenders. UK regulators are actively shepherding SMEs towards the online space; moreover, under the UK bank referral scheme, traditional lenders are now required to refer SMEs to alternative players, should their loan application get rejected.
Marketplace lending is here to stay
Just when it started to look like the marketplace lending bubble was set to burst, Lending Club – the most troubled player of all, has secured funding worth $1.3 billion from the National Bank of Canada. Whether it’s a sign of better things to come for the whole industry remains to be seen. Relative to traditional banks, who provide loans worth trillions of dollars to SMEs every year, alternative players could still be considered by some as ‘small fish in a big pond’. However, given the innovative lending model and the extent of the segment’s growth over the last few years, marketplace lending looks set to become a more widely used form of financing for SMEs.