http://reports.pitchbook.com/fintech-part-1-online-lending/
...
SMALL BUSINESS LENDING
According to a Harvard Business School case study, small businesses
have created two-thirds of US jobs since 1995. Even so, these enterprises
have become increasingly shut out by traditional banks. To apply for
a loan, the average small or medium enterprise (SME) must fill out 25
hours of paperwork which in turn takes several weeks to process before
a credit decision is made. This low velocity of money wastes critical time
in which a small business may have urgent need for funds. Many of these
companies have both poor accounting and record-keeping. Furthermore,
the idiosyncrasies of small companies makes finding comps difficult if
not impossible. For banks, this makes the transaction costs of lending
$100,000 equal to lending $1,000,000. ...
...
for sme lending....OnDeck (NYSE: ONDK) and Kabbage offer more traditional lines
of credit, but are able to avoid mountains of paperwork by employing
data imported from tax software such as Intuit (NAS: INTU), as well as
social media (e.g. from Foursquare which can track foot traffic)....
...
UK-based Funding Circle—backed by Index Ventures, Accel Partners,
Blackrock, USV and others—offers term loans to small businesses in the
UK and US and just expanded to the Netherlands, Germany and Spain
by acquiring German lender Zencap. The company originally offered
loans through an online auction process, but has since transitioned to
a proprietary model to assess credit risk and price loans. The company
resells loans to individual and institutional investors under the guise of
earning a high return...
...
SoFi has already expanded from student loan refinancing
for the most creditworthy borrowers graduating from elite programs
to mortgages for similarly “elite” borrowers, including interest-only
options with faster underwriting and less restrictive liquid net worth
requirements than traditional lenders....
...
According to a 2015 Goldman Sachs report on the rise of
shadowbanks, traditional lenders stand to lose $209 billion in unsecured
personal lending and $177 billion in small business lending to online
upstarts. In order for these platforms to justify lofty valuations, they
will need to not only realize their potential in current verticals, but also
tap into much larger markets such as the US mortgage industry, which
originates $1.2 trillion annually.1 ...
...
Prosper’s 2008 class
action lawsuit ... obliged the platform and fellow lender Lending Club
to register with the SEC. The costs of SEC registration increase the
barriers to entry for peer-to-peer lenders and thus put a constraint on
new platforms. ...Prosper, the only peer-to-peer lender
to weather both the financial crisis and the settlement of an early class
action lawsuit from investors, announced in May that it would lay off over
28% of its staff due to declining loan volume....
...
Securitization of online-originated loans remains another essential piece
to the puzzle for these lenders to attract long-term, low-cost capital.
Through 2Q 2016, cumulative securitization issuance has reached $10.3
billion according to PeerIQ, ...Marketplace lender securitizations
are similar to ABS (asset-backed securities) in other consumer credit
classes; they have similar WALs (weighted average life—the average
amount of time until a dollar of principal is repaid), offering prices and
subordinations, yet are rated lower than comparable securities. ...
...
the long-run knock on effect from underwriting
underperforming loans in an efficient marketplace platform are worse
than the short-term losses from charge-offs....
...
There may be increased opportunity for borrowers to commit fraud due
to lax controls on the use of funds for their intended purposes....
...
Since the start of 2011, online
lending has attracted $12.6 billion in capital across 463 completed
deals....
...
We’ll
likely begin to see platforms cut costs and soon accept down rounds,
as the increased regulatory scrutiny of the industry comes with higher
compliance costs. In order to accommodate hot money, some platforms
dropped lending standards. ...
...
London has
accounted for 10.4% of capital invested and 8.5% of transactions....
...
, the influx of capital into online loans is only made possible with
heightened transparency and sophisticated tools to help analyze both
single and packaged loan products....
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