What are the borrowing options for middle class Canadians today? The spotty customer service, hidden fees and slow turnaround of traditional bank loans? The ultra high rates of credit cards or payday loan operators? The hassle of putting your home up as security for homeowner equity loans?
Want to shop around to different providers to get the best rate? Be careful, as multiple applications can actually hurt your credit score. Could this outcome be by design to discourage shopping around for loans?
Big Data 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. Welcome to marketplace lending.
- GroupLend, based in Vancouver, offers loans of $1,000-$30,000 over a term of three years. GroupLend launched six months ago and has seen significant market demand, claiming $50 million in loan applications to date — double their initial expectations.
- Borrowell, a Toronto startup, provides loans of $1,000 to $35,000 over terms of three or five 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 three or five years” versus the interest only payments and ongoing costs of a LOC are compelling for many consumers.
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 per cent to 17.5 per cent for GroupLend. Borrowell rates range from 5.9 per cent to 18 per cent.
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.
Once processed, the platforms “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 except Saskatchewan, Quebec and Nova Scotia, and Graham indicates initial interest has cbeen strongest in BC, Ontario and Alberta.
The average loan size at GroupLend is around $15,000. The typical loan APR is in the 12 to 13 per cent 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 ( appx. 65 per cent), the balance of applications are for other needs including weddings, home renovations and used cars.
The opportunities and challenges of alternative finance startups
The two players are friendly with both seeing the benefit of legitimizing the marekt and agreeing that there is enough business to go around. Another Vancouver entrant, Lendful, is also preparing for a 2015 launch.
Graham saw going to market with credible investors as a key challenge they overcame as they worked to build trust with their customer base. As advice for other alternative finance startups 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 and financial technology appear massive. The huge gap 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 five 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 believes 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 two 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 exchange-traded funds.
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, declared “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. I predicted that crowd lending would outpace crowd funding as the fastest growing model in Canada this year in an earlier post. 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.