The consumer loan experience is getting an upgrade in Canada courtesy of some new players that are targeting the long waits and paperwork hassles of traditional loans and the high rates of alternative providers like payday loans. Experience in other markets like the US and UK points to a coming wave of disruption to the benefit of customers, platforms and others and at the expense of the big banks.
This post first appeared in CrowdfundInsider and ITBusiness in April 2015.
Marketplace Lending to the Rescue
Two marketplace lending startups are using algorithms and sophisticated data analytics to enable consumers to apply for unsecured “personalized” loan quotes in minutes and to receive funds, as soon as the next day. The funds are sourced from institutions and sophisticated investors without the traditional middlemen.
Often referenced to as P2P lending or Peer to peer lending, that term has become a misnomer as institutions and angels rush into the lucrative space.
GroupLend, based in Vancouver, offers loans of $1,000-$30,000 over a term of 3 years. GroupLend launched 6 months ago and has seen significant market demand; claiming $50M in loan applications to date, double their initial expectations.
Borrowell, out of Toronto, provides loans of $1,000 to $35,000 over terms of 3 or 5 years. Borrowell has already received 500 loan applications in less than one month in operation. Clearly the consumer appetite for a lower cost, convenient, online loan platform appears strong.
For some consumers, it would seem that a revolving Line of Credit (LOC) would offer a much lower interest alternative, but Borrowell CEO Andrew Graham points out the benefit of “knowing the debt will be gone in 3 or 5 years” versus the interest only payments and ongoing costs of a LOC.
GroupLend looks at thousands of data points including recent banking transactions to better understand applicant’s ability to pay. This informs approvals and personalizes the rates with an APR between 6.3%-17.5% for GroupLend.
Borrowell rates range from 5.9%-18%.
Over time, GroupLend CEO Kevin Sandhu noted “the algorithms get smarter, so that we have been able to reduce the rates charged already.” While the data sets are small to date, the complexity and massive size of the consumer loan industry indicates the impact Big Data could have on informing new product models going forward.
The platforms then “sell off” the loans to the investors who earn an interest premium for the risk taken. A growing lineup of institutional and angel investors have seen the massive success of this new product category in markets like the UK and US, both in terms of returns and the low default rates.
In the case of Borrowell, those investors include Equitable Bank and OakWest and high profile angels like John Bitove. A Family Office and other Angels also back GroupLend. The promise of better investment returns is getting marketplace lending noticed. Smart money, for sure.
Who is using these platforms?
Sandhu states that they have done business in all provinces and territories ex Saskatchewan, Quebec and Nova Scotia and Graham indicates initial interest has come from BC, Ontario and Alberta.
The average loan size at GroupLend is around $15,000. The typical loan APR is in the 12-13% range, far cheaper than credit cards or payday loans but more than other financing options. Sandhu points out that while credit consolidation has been the biggest category of applicants (~65%), the balance of apps are for other needs including weddings, home renovations and used cars.
The opportunities and challenges of Fintech or Altfi Startups
The two players are friendly with both seeing the benefit of legitimizing the sector and that there is enough market share to go around. Another entrant Lendful, also based in Vancouver, is currently preparing for a 2015 launch.
Graham saw as a key challenge that “we were determined to go to market with credible investors” to build trust amongst their customer base. He added, “Get started with a great team as handling funds is high stakes. Push innovation while carefully adhering to regulations.”
Sandhu’s key challenge has been “making the right person aware of the product” as they are not a lender of last resort and that has been where some of the initial interest has been sourced. He emphasized the considerable investment that has been made in technology and that the Canadian market still lacks credit data furthering the challenge of getting the risk profiles right.
While the challenges are significant, the opportunities in Alternative Finance (Altfi) and Financial Technology (Fintech) appear massive. The huge gaps between investment returns and debt costs are a recipe for disintermediation.
Graham emphasized that the opportunity for other startups considering the space is considerable and that the Finance sector is about 5 years behind the Retail sector in the adoption of new models. Sandhu’s advice is to beware applying other market models to Canada as the market and culture is unique and needs to be customized. Still, he sees that the consumer lending space is on a precipice and startups like his are poised to “shake the banks up.”
Where will the platforms be in 2 years?
“Our visions is to be a mainstream option for Canadians coast to coast looking to refinance high cost debt,” states Graham. Sandhu also anticipates exponential growth in market share through building awareness of this new option amongst their target market of credit-worthy middle class Canadians.
While looking into the crystal ball beyond that is very difficult, both see expansion into other lending categories such as student loans or small business and even other financial services like Investments. Sandhu even foresees the participation of retail investors through bundled instruments like ETFs.
Lofty visions for sure. What about the banks?
The Big Banks Have Noticed
RBC CEO Gord Nixon recently announced that tech firms pose a threat and that the bank is open to start-up partnerships. The CEO of JPMorgan Chase, the largest retail bank in the US, announced, “Silicon Valley is coming” in his latest shareholder letter. Citi Bank recently announced a partnership with Lending Club, the big dog in marketplace lending in the US. Look for more partnerships with marketplace lenders, mobile payment providers and other technology players in the coming months.
And what about applications at Marketplace lenders hurting your credit score? Sandhu provides assurance that a GroupLend application will not affect your score. Looks like more consumer pain solved by Big Data…and entrepreneurial savvy.
The new players are young, entrepreneurial, enthusiastic, technology and finance savvy and nimble. The big banks have deep pockets and long track records of success. This disruption in lending space driven by Big Data startups will certainly be fun to watch.
What do you think? Will marketplace lending get traction in Canada? Would you use one of these platforms? Why or Why not? Please add a comment below.