A comprehensive report on the leading alternative lenders in key global markets over the coming year states that China will become the biggest loan marketplace by value, although U.S. loan forums will continue to grow apace. Both countries could suffer growth checks from legislators’ attempts to regulate the sector and protect vulnerable borrowers.
Europe and the biggest European AltFi market, the U.K., have already established a working relationship with legislators and any checks on growth are more likely to come from adverse market conditions reducing the credit rating of struggling companies, and consumers.
High volumes in China; little regulation
Moody’s states that in China “according to some estimates online lending volumes are as much as several times larger than they are in the US or Europe.” One type of marketplace lending, micro loans issued by established e-commerce platforms like Alibaba and JD.com, has together established a skeleton infrastructure that helps them perform credit checks on applicants; the other type comprises smaller ventures that try to match borrowers with lenders.
The lack of effective regulation to monitor and control these smaller alternative lenders has caused no small degree of chaos. Some believe there are more than 2,600 such platforms in the country. According to estimates by Wangdaizhijia, a Chinese research provider specializing in the alternative lending industry, around 800 platforms had either failed or had liquidity issues this year through early December.
Pre-existing Chinese regulation tries to control irresponsible lending practice by preventing alternative lenders from providing ‘credit enhancement’ (e.g. collateral, insurance, third-party guarantee) from their platforms. These platforms are also prohibited from accepting capital from lenders that use their platforms for activities other than alternative lending.
While this prevents the most blatant fraud attempts, it certainly does not address the issues of fair rates or transparency. Regulators’ key proposals are to formalize rules for all internet finance providers to small and medium-sized enterprises (SMEs), mandating disclosure on interest rates and delinquencies. Moody’s analysts elaborate:
“The new regulations would also improve transparency on borrowers’ credit performance because lenders will be required to submit information on small loans to a licensed credit bureau.”
The two internationally subscribed Chinese securitisations, backed by online lending collateral, noted by the credit graders were those by Alibaba, which repackaged loans to small businesses; and JD.com which securitised payments on short-term loans to customers who buy goods from its platform.
Moody’s 2016 forecast holds that, “We do not anticipate any significant marketplace-loan securitizations elsewhere in the Asia-Pacific region in the next year, with the pace of originations likely remaining low outside China.”
America: Chance of light rain, but no storm clouds yet
The U.S. sector is still expanding and the lending volumes of the two biggest market players, Prosper and Lending Club, is indicative of just that.
Lending Club’s semi-annual total in the second half of 2014 was some $7.5 million, growing to $14 million in the first half of 2015. Although it dipped in the second half of the year, the cumulative figure was still higher than that for 2014. The cumulative loan value for Prosper was also higher than that for 2014, with a new high of $6 million in the first half of this year.
Many established firms have diversified into other types of loans. For example, Social Finance Inc. (SoFi), which started out issuing student loans, has moved also into consumer loans and mortgages. Lending Club famously started out in consumer loans but now has a major foothold in SME loans.
Moody’s warns that an economic downturn could “squeeze some participants out of the market,” as the combination of reduced credit quality and demand for loans would be compounded by some lenders relaxing their underwriting standards, in addition to possible bankruptcies under the weight of defaults.
Moody’s macro forecast based on projected unemployment and minimum wage values, however, is positive.
Europe: Greater hope for expansion
Because most of the European platforms outside the U.K. are quite newly established, there is greater hope for expansion; particularly if marketplace lenders are able to be adaptable to the specific needs of small businesses, such as allowing borrowing against invoices.
Moody’s predicts that “marketplace lenders might also continue to gain scale and fuel borrowing in new markets through acquisitions or expansions,” citing Funding Circle’s recent agreement to buy German venture Zencap as one case of aggressive M&A activity.
The report also highlights a loosening of Europe’s regulatory environment in the AltFi space. In France, for example, the national government passed new rules and standards in late 2014 to promote consumer protections and transparency. By setting a ceiling on the size, interest rate and durations of types of loan, they aimed to “facilitate lending by non-banks and more P2P activity.” In Italy, a parliamentary decree in March 2015 extended access to crowdfunding to SMEs it defined as innovative, where previously such finance has only been available to start-ups.
Of course, no forecasts are 100 percent accurate but the three themes Moody’s describes — a lack of regulation in China, mixed sentiment in America and expansion potential in Europe — are worth monitoring over the next twelve months.