Online marketplace (or peer to peer) lending exploded in size, growth, and ubiquity over the past decade. An April report by American Banker quantified this growth at 700% over just 4 years – not uncommon for a relatively new market like online lending, but impressive nonetheless. Yet the meteoric rise of this industry has been contained to a few relatively homogenous, developed credit markets. As online lending reaches its adolescence and moves past what critics dismissed as its ‘fad’ phase, a lingering question remains – which markets are next?
The opening bell for marketplace lending rang in 2004 when the consumer lender Zopa launched in London. Soon after in 2005, Prosper Marketplace was founded in San Francisco. The original marketplace lending model was a variable rate auction market, much like an Ebay in which lenders and borrowers could bid to provide and receive loans. The idea was to create something similar to a community credit union, online, available across the US, to free consumers from the debt of high-rate credit cards and non-existent bank loans. Other lenders like Lending Club, Funding Circle (the first peer-to-business lender), and SoFi (the first student lender) soon joined the space to create more options for borrowers.
The prodigious growth of this sector took place mostly in the US and the UK in the early days. Emulating the success of these mature credit markets, lenders in similar economies such as Germany (Auxmoney), Australia (SocietyOne), France (Prêt d’Union), and Sweden (Trustbuddy.) Today, marketplace lending exists in a wide variety of markets, visible in some global performance trackers, from Israel (eLoan) to Kenya (Branch.)
As lenders mature and look to expand into new geographies, they find themselves asking which present the best opportunities for growth. Some more ‘mature’ markets, such as China, have seen high risk and tumultuous growth, marked by fraud and under-regulation. To evaluate which markets are the most attractive, it’s perhaps best to dive into which are the most similar to current successful ones. To do this, we’ll break them into three tiers:
- Tier One: Similar – stable, developed economies with robust credit infrastructure
- Tier Two: Dissimilar – either fast-developing economies with new but quickly maturing credit infrastructure or developed economies with very unique credit conditions
- Tier Three: Foreign – underdeveloped, frontier credit economies
Breaking apart geographies into these groupings is a way to ask “which would be the easiest to expand into because of their resemblance to current markets?” These may not necessarily be the economies with the highest potential rate of return or the biggest addressable market. But their similarity to current markets makes them simple copy-paste opportunities for existing players and new entrants.
This question in itself raises another – what criteria are the best to evaluate how similar a new market is to a current one? The below list is a good starting point. (In full disclosure, I have never worked on international expansion strategy for a marketplace lender.)
- Credit Metrics – Are credit barometers like FICO readily available? Are they ubiquitous? Are they accurate? Can lenders easily access personal identifiers, like social security numbers, to verify recipients? Is there a wealth of data with predictive correlations to default likelihood.
- Legal and Regulatory Environment – Can lenders cheaply recoup their losses in cases of fraud and default? Do borrowers have robust bankruptcy protection? Are interest rate caps unrealistically low? Is arbitration transparent and free of corruption?
- Online Penetration and Trust – Are there a lot of potential borrowers online? Do they trust online services that ask for their personal information? Will they even look to the internet for a loan?
- Current Banking Failure – Is there a real need for an online lender, or can borrowers easily go to their banks, friends, and community to easily get credit? Is the country already saturated with other online competitors?
This list is imperfect, and it’s possible to imagine many other relevant criteria, such as total addressable market, ease of doing business, GNP, the local language, or the cultural stigma associated with credit. While those are all important to a lender looking to expand, the four laid out above are a priori questions to ask. For instance – does it matter that a country has a huge addressable market if there’s no good way to verify a borrower’s identity, or to recover losses if a borrower defaults?
With these criteria in mind, we can break this question apart into the three tiers, from Similar to Foreign, to take a closer look at the nascent or undiscovered marketplace lending economies of the world. Our next article will cover the first tier and examine the countries most similar to current successful markets. Those will be the best poised to break out as the next great online lending revolution.
About the author: Nik spent more than 4 years working on strategic partnerships for Funding Circle US in San Francisco. He is presently an advisor to Squaredoor. He was previously the director of operations and strategy for Tripflavor. He graduated with a BA in Philosophy and Political Science from Stanford University and with honors in Ethics in Society.