Day 2 of LendIt Europe 2016 kicked off with the announcement of the winner of PitchIt @ LendIt. LendingWell, a company focused on bringing online lending investments to financial advisors and their clients took home the trophy.
Next was a panel focused on the US market. Matt Burton commented that to say it has been an interesting year is an understatement. According to Matt, the hype is gone and it is now much harder to raise capital. The bar for new companies has doubled and if you want quick money you’re in the insurance space, not the lending space.
On the topic of investing in the online lending space, Phin Upham of Thiel Capital said they made one investment in a niche lender in the last year. He also believes the trend of new companies has changed. Since firms have struggled to raise debt and equity capital, they are instead going to banks and corporates for partnerships to focus on collaboration rather than disruption.
Broadly, venture capital investments in fintech are down 50%, and this number is even higher in the US. However, there is one company that continues to buck the trend. Phin commented that while some companies are scaling back on product expansion, SoFi continues to spend on expanding the business, launching several products in this year alone.
On the health of the industry he thinks volumes, credit, and profit margins remain healthy for both the high quality lenders and the bottom of the market while the middle market has been hurt. The banks simply can’t cater to the top 10% of the market which is one reason why SoFi has done, and continues to do well. Matt Burton said one thing that has aided SoFi is that they have the most sophisticated capital markets team in the industry.
Another key theme in the US in 2016 has been the pullback of investors. However, Kathryn Petralia shared how they were unaffected as Kabbage funds loans differently and are not dependent on temporary institutional investors. She stated that they have spent more time educating regulators and investors over the last year, noting that the differences in funding sources across platforms is less important than performance and compliance. On the topic of the pullback investors in 2016, Matt Burton said investor trust takes years to build, but seconds to lose.
Regulation was also a hot topic for the panel, discussing the new fintech sandbox environment proposed by the OCC as well as the various industry groups that have formed as of late. Matt Burton commented that he hopes the associations take a big tent approach and be more inclusive of the platforms they allow into the association. Ram Ahluwalia of PeerIQ talked about the hybrid model as well as securitizations in the industry.
Finally the panel commented on Goldman Sachs entering the online lending industry. Phin stated that he doesn’t know why Goldman would be able to execute better than any other company in the online lending industry. Matt Burton mentioned that he wasn’t sure if Goldman would be able to keep up with the rapidly changing environment.
LendIt Co-Founder Jason Jones moderated a panel on how lending is impacting other areas of fintech. Panelists brought up the fact that the checking account is still the center of people’s lives and if you want to send money abroad for instance, you use a different service like TransferWise. The panel discussed the concept of an ‘app store of fintech’ as well as how many companies don’t aim to cross sell other products. Cross selling represents an untapped opportunity for many companies. Carl-Richard Häggman from iZettle talked about how they began cross selling their small business customers, first offering payments and then offering loans to businesses. There is no additional cost of acquisition and they have the data including the cash flows of the business for underwriting.
Margaret Doyle from Deloitte said their recent research found that while there are benefits that many p2p lenders offer, when they looked behind the hype these companies’ underwriting practices are actually very traditional. She also believes that until more time has passed and until we have a normal interest rate environment, it’s hard to draw conclusions on the performance of the industry.
The panel also discussed PSD2 which will require banks to provide access to third parties through APIs. The panel commented that PSD2 will be a goldmine for lenders as they will immediately have access to large amounts of data for underwriting.
We also heard from Lord Adair Turner who made news earlier this year for making some negative remarks about the p2p lending industry. However, he clarified that his comments were taken out of context and his remarks were made after he thought the interview was over. His actual opinion of the p2p lending industry is mostly positive. He believes banks are useful, but create major risks that non-bank lending can solve as they aren’t leveraged institutions. There is a benefit of the direct contractual link between borrowers and lenders.
Turner believes the p2p lenders can do lending at least as well as the incumbents while providing better customer service. He compared direct lenders to adding a spare tire to a vehicle, making credit crunches less likely. Turner closed by saying that p2p lenders should keep it simple, keep it transparent and in turn they will play a useful role in providing credit. How much that role should be, in his opinion, will be determined by competition, not regulators. His keynote was covered in many publications including Business Insider and the Financial Times.
Jaidev Janardana of Zopa did a presentation titled “2016: Growing Up”. He shared recent loan volumes from Q1 2016 which showed marginal growth for the US and UK, up 2% and 3% respectively. Q2, 2016 was a challenging quarter as UK originations dropped 7% while US volumes dropped 30%. In his eyes, the industry is moving away from focusing on growth and is instead optimizing for profitability. It’s important for platforms to not obsess over originations numbers and to not try to inflate originations by bringing in poor quality borrowers. Jaidev shared that Zopa was profitable in September and will continue to be profitable going forward.
Robert Waldrop from the University of Cambridge and Warren Mead from KPMG provided a global overview of alternative finance across the world using data from their studies on the major geographies involved in online lending. Included in the studies were surveys from 1,086 platforms, including 376 in China and 149 in the US. The US dominates globally when measured on a per capita basis, while strictly from a volume perspective China continues to be the largest market. Robert also talked about institutional involvement, cross border trends and each market’s view on regulation. They continue their efforts on researching p2p lending with six more studies in the works.
The AltFi data presentation discussed the importance of data in the industry. According to Rupert Taylor of AltFi Data, platforms have worked hard to provide data points to investors, but there still needs to be third party verification. Platform calculations of returns aren’t always credible and should be in question as their methodologies differ. This makes it difficult to compare one platform to another. Additionally, there is a need for loan books to be standardized. He highlighted that during the financial crisis, disclosure existed in the MBS market, but they were in an indigestible format. Only once we have solid data can there be more scrutiny to create confidence in the industry.
The morning concluded with Rhydian Lewis of RateSetter discussing the cost of certainty. His presentation centered around the fact that the safety that banks offer comes at signifiant cost. P2P lending is not solving for a guarantee but gives investors the choice not to pay for the cost of absolute certainty. Rhydian noted that there is an opportunity cost of having money in a bank and posed the question on whether the cost of certainty was a good value. He posited that one should optimize for value instead of safety at all costs.
In the afternoon the conference split into three tracks: Credit Risk & Technology, Continental Europe Opportunities and The Future of Fintech. Recorded sessions are available on the LendIt website and slide presentations will be available shortly on the LendIt blog.