I think this is a good opportunity to talk about something concrete we are actively looking at, explained in a way that (I hope) will catch the attention of everyone (including my mum, who I can see right now with her dictionary on… And no, she does not use Google translate)
The two big families of the new lending landscape are P2P lending (person to person) or SME lending (to small businesses).
There are also some hybrid versions of it like corporate lending money to their employees or persons lending a fraction of the capital to a business, in a crowd funded way, but I would say these are less populars.
Let s start with SME lending.
There is no way a bank can profitably make a 20K loan to a business.
The cost of the paper and the time of the employee(s) required to assess, release, monitor and eventually recover the money back will easily eat all the mark-up that the institution would possibly charge (unless they apply illegal outrageous interest rates, which would put them out of business anyway).
This is what became the core business of many Startups of this space.
Use non-conventional (like aggregated data from the POS or geo-localised transactions data) and conventional (good old bank statements) data to make an assessment on how likely is the chance to recover the money if and when the loan happens.
Now : there are two big families of these Startups (I know, life is a binary tree) : the one competing with the banks (by collecting their own capital and lending their own money) and the one trying to re-intermediate the banks in this process (in other words, selling their platform and services to the banks so they can use their capital to perform the loans).
An example of the latter is Advanced Merchant Payments, out of Hong Kong,
focused on the provision of working capital loans to SME’s based on an algorithm that credit scores Merchant payment and bank account data.
IWOCA, focused on the UK and European eTailer market uses an algorithm to provide working capital loans to eTailers based on their digital footprints across Ebay, Amazon PayPal etc. The latter is an example of a startup in competition with banks.
They are both doing quite well, and of course I will not put my Venture Capital hat on as the purpose of this is purely informative.
The default rate (the loans not repaid back) is reasonably low, and the return is good. Remember, for some businesses there is no other way to have access to capital.
Let s talk about P2P lending.
This space is very crowded, and actually even easier to understand : if I have a decent social presence, if my network is solid, if I am a regular customer of e-commerce platforms (like eBay) that allows some data about my transactions to be pulled off, if on the top of it I give access to my bank statements, you can have a quite educated guess whether or not I will be able to repay a small loan that I am asking.
Interesting enough, this “universal, empirical credit score” can be built using a number of different techniques, including NPL and psychological questionnaires (I am thinking specifically to EFL that releases microcredit based on a very specific profile questionnaire, started in developing countries.
Recently, many Startups have arisen just using Facebook and LinkedIn to assess credit worthiness. Still early stage, but promising.
P2P lending is booming in countries (like Latin America) where the Consumer loans have very high interest rates, but it started in US and more maitre countries as data were of course richer and available in an easier way.
Here is a US panorama of the most famous P2P lending platforms.
I am – on purpose – leaving out the crowd funding, for which a separate post will be due.
If any of you bothered to read so far, would be great to hear your thoughts on this. Obviously, if you are in the Fintech business you should have stopped a while ago.
The reason for this post is that I saw this morning on my Facebook wall a dear friend asking me : “Matteo, can you explain to my step-father why Bitcoin is or can become so important, in words he can understand?”.
I leave that challenge for a future post, and starts with something else…
Stay tuned
Matteo