Canada has a concentrated banking system. There are 5 major banks which share approximately 80% of the market and because of that they enjoy high profitability. Profit per capita for Canadian banks is 2 times that of its American peers. When it comes to total industry profitability, Canadian banks are ranked 4th in the world.
Transaction value in P2P & MPL consumer lending market in Canada was $28 million in 2015, according to a report by University Of Cambridge and Chicago University.
This kind of oligopoly should have encouraged fintechs to disrupt this cozy market. But Canada is still a very small and under-penetrated market in comparison to the US.
There are only a few serious P2P lenders in Canada due to regulatory issues. High-interest rates, low default rates and lack of choice to consumers are what prompted the decision to launch Borrowell.
Toronto bases Borrowell was started in 2014 with a seed capital of $5.4 million from 5 investors (Dan Debow, Equitable Bank, John Bitove, Oakwest Corporation, Roger Martin). In the beginning of this year, they raised $6.4 million in debt financing from 6 investors ( Adam Felesky, Equitable Bank, Freycinet investments, Hedgewood, Oakwest Corporation and Power Financial Corporation). Andrew Graham, CEO, and founder has worked at PC insurance, a fast growing consumer firm as a senior director. He holds an MBA degree from Harvard University. Eva Wong, COO, and co-founder has a vast experience of working for both profit and non-profit organizations. Salim Naran, CTO, and co-founder was senior vice president of Paradigm Quest and also co- founder of Beaufine Solutions.
Borrowell is a platform where borrowers and lenders connect in a hassle-free and faster way. Borrowell provides personal unsecured loans ranging from $1,000 to $35,000 for a period of 3 or 5 years. The foremost use for Borrowell loans is debt consolidation.
Credit card interest rates in Canada are exceedingly high, usually between 19.99% and 29.99%. Trying to get out of credit card debt is usually difficult with such high-interest rates. Refinancing credit card debt to a lower rate through traditional bank requires some kind of collateral. Usually, banks require the house of the borrower, whereas Borrowell can facilitate the loan without any collateral.
The startup focuses on providing loans to those with a credit score of a minimum of 660, and on average their clients have an average score of 700. After the approval, depending upon the credit score and other credit worthiness factors, the rate can go as low as 5.6%.
Even if the customer is paying a higher rate of interest, it still will be much lower than what they are paying on their credit cards. Default rate has been really low mainly because the company is relatively new and they only cater to people who have good credit scores, but it might go up in future as their loan book expands.
Borrowell generates its revenue by charging origination fees. The origination fee is a onetime fee; it covers the cost of evaluating the application, finding the right lender and for providing excellent customer service. It usually ranges from 1%-5% of the loan amount depending upon the credit profile; better the credit profile, lower the fees. The origination fee is added to the loan amount approved. Since regulations vary from province to province, they register individually in each province.
A major concern in marketplace lending is fraud. Borrowell uses both active and passive measures to counter fraud. Their proprietary technical platform solution ensures proper identification and they also use data from 3rd parties to authenticate borrowers. One of its most important backers is the mortgage-focused Equitable Bank. The bank, looking to diversify into new products has been an investor in both the debt and equity of the young fintech startup. Power Financial Corporation, one of the largest and most respected financial institutions in Canada is also partnering with Borrowell to fund borrowers. Association with such giants in the industry gives it a stamp of approval which can be leveraged for further growth.
Marketing channel: Borrowell-Equifax partnership
According to a 2015 survey by Bank of Montreal, around 56% of Canadians have never checked their credit score, and 14% check their scores just once a year. Even, in US survey conducted by Equifax of more than 1,000 customers across the nation, only 27% checked their credit score, with most of them using third party sources to extract their score. Borrowell partnering with Equifax for the free credit score is a great marketing tool to drive initial interest in the company.
An important issue for the company would be to ensure that it is on the right side of the regulators in Canada, who have been extremely slow in opening up to the peer to peer funding model. Also, American lenders were able to leverage the angst against the big banks in the wake of the financial crisis to draw borrowers and lenders. Such apprehension does not exist in the Canadian consumers’ minds. The company will have to be aggressive in its marketing strategy to ensure first movers advantage.
Canadian households owed $1.9 trillion in personal debt as of January this year, a rise of $94.2 billion from a year earlier. Credit-card debt amounts to over $82 billion and consumer installment loan accounts for over $138 billion.
P2P lending is relatively still new in Canada and expected to grow exponentially. Borrowell will definitely get the advantage of starting early and with the backing of prominent Canadian financial institutions, is poised to grow into a Canadian marketplace lending unicorn.
Author: Heena Dhir and George Popescu