The Future of Marketplace Lending – Technology & Transparency
On Thursday May 28th, 2015 Proplend attended the 1st Annual European Alternative Finance and Marketplace Lending Conference. Attendees included: Blackrock, Macquarie Bank, Deutsche Bank, RBS, Asset Management and Private Equity Firms, Regulators, and Leaders in the European Alternative Finance and Marketplace Lending space.
We guestimate that approximately 30% or more of the attendees were from the “other side of the pond,” sparking discussions related to the growth potential in the UK and Europe. Having attendees from the US, pioneers within the sector, also provided additional insight on the successes of more established platforms and the need for further awareness amongst investors, consumers and SME’s. The conference allowed platforms and key decision and policy makers to come together and discuss why Alternative Finance is required, the future of the industry and the benefits for both lenders/investors and borrowers.
Proplend CEO, Brian Bartaby, spoke on a panel that seemed to trigger discussions and a debate on two of the three main topics outlined during the conference: Technology and Transparency, the third topic being Awareness.
Manish Kapoor of West Wheelock Capital outlined what he believes platforms need in order to be successful and continue to grow:
- Hire individuals with credit writing experience and that have been through a downturn
- Proplend has a combined 60 years’ experience in the property finance and credit space. We employ a team of experienced professionals who conduct due diligence on each transaction. Additional external due diligence is also performed by solicitors and third-party valuations are conducted by a RIC’s Chartered Surveyor.
- To be able to source borrowers
- Proplend, as stated above, has a long history and track record within the commercial real estate and financing sector. Many, if not all of our loans are sourced directly through existing relationships.
- Need to understand their ability and willingness if something goes wrong
- All Proplend loans are supported by 1st legal charge over the property and we also hold 6 months interest in the event a borrower misses a payment.
Some takeaways we had from the conference are listed below:
- A company needs to ensure they are agile and use common sense when it comes to decisions on when and where to use technology – Brian Bartaby, Proplend (Click HERE to listen to the full panel discussion on The Importance of Technology & Reporting for P2P Platforms).
- The alternative finance industry has made us look at how we interact with our customers and how to improve and develop our products – Tim Clay, RBS
- Let technology allow you to be flexible and creative. Allow technology to help you but not make the decisions for you – Manish Kapoor, West Wheelock Capital
- How technology is changing the underwriting process:
- Captures additional information and better understanding of lenders and borrowers
- Availability of data for referencing and due diligence. All online. Credit ratings and other information is more readily available
- Loan documents all on the cloud. Making it easier to review and manage. E-signatures are also an important step
- Being transparent with investors is an important trust building exercise
- Delivering borrower information, valuations and other details related to the loans are all important in establishing credibility with investors and showcasing your expertise in the loan origination category
- Will providing too much information confuse or cause retail investors to over-think the decision making process?
- Is there a risk of increased competition if you are being 100% transparent? Platforms in the US are scaling back on the information they give to investors. The competition is increasing and they don’t want to divulge their strategy or loan approval process. This is not a concern for the UK or Europe and it was concluded that providing more information can only build trust awareness.
- Major discussions on the lack of knowledge among SMEs when it comes to financing and “Alternative Financing” options
- Only 10% of SMEs are aware that AltFin is an option – Adam Tyler, The National Association of Commercial Finance Brokers
- Message for SMEs: “There is an alternative to bank lending”
- Retail investors are unaware of what Alternative Financing is
- We must build the awareness and at times become creative with the offering (Burrito Bonds)
- Crowdfunding is as much an exercise in brand building – Eric Partaker, Chilango
- Banks have a “tick the box” mentality, if you fail to tick one of them then you don’t qualify
- Alternative Finance doesn’t mean offering financing to those with a poor quality rating or if you have bad assets, it is a resting place for loans that cannot find a “home” – Bob Young, Fleet Mortgages
- Debate/comments on how stable the market is right now and what will happen to the Alternative Finance market in a downturn. The importance of proper due diligence and valuations was stressed
- Massive gap between non-bank transactions in the US and Europe (80/20)
- Flow of entities outside a reg-wrap will continue to grow – Daniela Francovicchio, European Investment Fund
- The knowledge on SME risk has been restricted to the banking system but the more movement from mid-cap to SME the more potential we have to work with them or create a fund and portfolio model that works for SME’s
- Diversification would help monitor and assess risk
- There is a gap between the micro level and the larger listed firms. There is difficultly amongst the £5-10m plus market. The business angels market is growing and will help with this gap
- FCA comments from Tin Lau,
- The FCA wants to work more closely with peer to peer platforms, and encourage growth only targeting the abusive platforms
- UK institutional investors on AltFin platforms are c 5-10%, compared to 60-70% in the US
- The industry is still an infant, some concerns re 5-10% is the right level for institutions, and it’s not the FCA’s remit to define this – it’s for the industry
- EU regulation is inevitable as the industry matures
- UK is principles-led wrt regulation, and gives guidelines, EU is far more prescriptive re setting out rules
- Insights on what will help advance the Alternative Finance sector (non-regulatory): increase the profile of the sector, co-investment (Institutional and retail) and track records – Elizabeth Noble, European banking authority
From Keynote Speaker Niall Bohan, European Commission
- AltFin in the EU capital markets
- It is accepted and required
- Compensate for the difficulties in the current banking and funding issues
- CMU debate
- Reduce dependence on bank loans. Huge problems 2009 and beyond based on dependence on bank lending
- EU lag in market-based finance (Source: new financial)
- Venture capital US vs EU (EU venture capital could have injected £90b)
- Strengthen links in funding chain
- Provide enabling policy environment for crowdfunding and p2p (recognise local character and small scale)
- Investment barriers
- Relax regulatory restrictions on institutional investment in equity and VC
- Increase access to credit scoring or SME credit worthiness data
- Pragmatic approaches to differences in outcome of insolvency procedures
- Tackle discrimination – double taxation
- Mitigate risks
- Understanding suitable investments for retail investors and under which condition (disclosures, limits, min, entry, tickets)
Full Presentation HERE
From Keynote Speaker Angela Ceresnie, Orchard Platform
- Orchard has had a front row seat to the evolution of marketplace lending
- The US market is more developed than the UK/EU
- The advantages of Technologies:
- Cost Advantages: lower borrower rates
- Customer Experience: quicker underwriting and time to funding
- Transparency to Investor: data availability and loan distribution
- Three types of Originator Platforms:
- Orchard will start to introduce marketplace lending as part of a portfolio
- To build the future of credit you must have:
We believe the conference initiated important conversations related to the growth of the Alternative Finance sector in the UK and Europe, however speaking about it won’t ensure that awareness is built, nor will it allow us to improve the sector; therefore we look forward to turning the discussions into actions plans and continuing to pioneer and represent the Peer to Peer Commercial Property Lending sector.