The most successful online lenders frequently reach a point where they are faced with a question: Continue developing domain expertise over one’s geography or expand internationally? Last year, we covered in-depth the kinds of markets that online lenders can expand into in a three-part series (part 1, part 2, part 3.) Yet, when a company makes a decision to expand, this still leaves a big question open: How will they do it?
Most marketplace lenders come to a three-pronged fork in the road: Expand by partnership, by acquisition, or by colonization.
Partnering into a Market
The first type of expansion is the most low-risk and the fastest to successfully undertake. A successful online lender looking at new geographies also faces a significant slate of new risks should they choose to expand without fully understanding the new market. If they partner with an existing player – whether another lender or an established financial institution – they mitigate a large part of this risk.
Partnering with a local company carries many benefits. A lender can instantly gain valuable insights about the new geography, such as the regulatory environment, credit and underwriting risks, and intensity of competition. They also gain a foothold through an established brand rather than having to build from the ground up in what may already be a fierce market. The drawbacks are that partnership is usually less lucrative for a lender: If they have to partner to enter a market, then they have to share in the gains from entering, and that often means making concessions back to the company they partner with.
Perhaps the industry king of expansion through partnership is Kabbage. Kabbage is an online working capital platform based out of Atlanta that has used partnerships to expand out of the U.S. to multiple geographies. In late 2015, they partnered with Spanish bank ING to begin offering €100,000 loans to Spanish small businesses. This also came with an equity investment from ING into Kabbage.
As Kabbage CEO Rob Frohwein commented, “As financial institutions embrace new lending technology, we see that platforms like Kabbage are interesting for them to provide a superior experience to their customers. We are incredibly proud of our partnership with ING, and most importantly, we are thrilled to serve the small and medium businesses powering the economy in Spain.” Kabbage also used an investment from SoftBank – a Japanese investment bank – to expand into the Asia Pacific region by first gaining a foothold in Australia, where it licensed its technology under the label “Kikka.”
Most recently, Kabbage partnered with Santander bank in the UK. As Kabbage COO Kathryn Petralia commented, “Kabbage’s business growth throughout Europe, the Middle East, and Africa has been exponential over the last several months.”
Expansion via Acquisition
Maybe the second most popular way for marketplace lenders to expand into new markets is by purchasing an existing player that already has a strong foothold in the market they want to enter. A marketplace lender that makes an acquisition is usually signaling a more committed desire than a tentative partnership expansion. This usually happens after significant vetting, due to the heavy costs incurred by the purchasing company when they buy out the local player, normally for a mix of equity and cash.
The benefits of acquiring a domestic competitor in a new market are similar to those that a marketplace lender achieves through partnership, with one big addition: They are able to maintain control over how their product is distributed in that new geography, and retain all the profit and benefits from offering it.
One of the most prominent examples of continued international expansion through acquisition comes from Funding Circle, which was originally founded in the UK. In October 2013, the marketplace lender to small businesses expanded into the US, purchasing San Francisco-based Endurance Lending Network. This came in conjunction with a $37 million equity raise for the firm. Then, in September 2015, Funding Circle continued its expansion into Germany, the Netherlands, and Spain with the acquisition of the Rocket Internet startup Zencap, which came following a $150 million round.
It’s possible to see the positive impact this continued expansion has had on Funding Circle’s ability to grant loans in the chart below. Loan count doubled between 2012 and 2013, and again between 2013 and 2014, as the firm expanded its U.S. operations. Likewise, though Funding Circle’s originations in continental Europe have ramped up more slowly, it maintained a similar pace of growth through the end of 2015.
As Funding Circle CEO Samir Desai mentioned following the Zencap acquisition, “Our vision is to help millions of businesses across the world sidestep the outdated and inefficient banking system and borrow from investors. Today’s news is the next exciting stage of this journey. By coming together, we combine Funding Circle’s leading position in the UK and U.S. with Zencap’s deep understanding of local markets to create the first truly global marketplace lending platform.”
Colonizing a New Geography
The last expansion method is the most controversial: Going it alone. Marketplace lenders can choose to “colonize” new geographies through a native expansion, bringing their brand clout and international expertise to a different market themselves, without any partnerships or acquisitions. This is a favorite method in many tech sectors, such as online commerce or the sharing economy. However, it has shown mixed results in the past, such as Uber’s painful exit from China due to competitive pressure from rival Didi Chuxing.
One of the more prominent examples of expansion through colonization comes from online lender OnDeck, which in 2015 separately expanded its U.S. operations to Canada and Australia by establishing new offices in both geographies. In Canada, OnDeck’s entrance was facilitated by the fact that it was entering a relatively uncompetitive market, with Lending Loop the other established lender in the region. Australia, conversely, is a relatively mature market with a host of other online lenders such as ThinCats, SocietyOne, and RateSetter – a UK peer-to-peer lender that expanded into Australia the same way as OnDeck.
As OnDeck CEO Noah Breslow commented upon expansion, “Australia represents an exciting growth opportunity. Similar to the U.S. market, in Australia, we see a huge gap between small business financing needs and the availability of capital from traditional sources. There is significant unmet small business lending demand in Australia, and we believe our online platform is well suited to address the capital needs of Australian small businesses.”
RateSetter made similar comments when they expanded via colonization. As founder Rhydian Lewis noted, “Australia’s financial system is ripe for disruption – for too long, banks have been offering below-par savings and loan deals in the absence of real competition.”
Success in going it alone depends on many factors, such as the ability to scale quickly in an already competitive market, and the ability of a company to leverage an international brand in a way that disrupts loyalty to local ones. This normally means that colonizing lenders have to be very well-capitalized – having raised a lot of equity – to support not only their existing operations but also their more nascent, experimental geographies. Time will tell if the examples above pan out for OnDeck and RateSetter.
Written by Nik Milanovic