International expansion is critical to the ongoing development and growth of marketplace lending businesses, especially those based in smaller markets. As Dr. Gal Aviv, the CEO of BLender, put it, “Offering multi-national P2P lending has been our vision since BLender’s establishment. Since our Israeli launch in 2014, we have built the foundation, infrastructure and technology to enable BLender to operate in the global market, so we will be able to face operating, cultural, technological, regulatory and taxation challenges.”
This expansion is usually easier said than done – as referenced above, there are significant operational hurdles to expanding the same business model between two distinct countries. There are 1,000’s of marketplace lending services around the world (1,500 in China alone) – and it is unclear how many of them operate across borders. Some of the most notable lenders that have expanded internationally are Bondora (Finland, Spain, Estonia), ThinCats (UK, Australia, Poland), and Funding Circle (UK, US, Germany, Netherlands, Spain.)
Yet none of the lenders who ultimately work across borders begin their lives as international marketplaces. To choose where to expand, they have to carefully consider a variety of factors, the most important of which we laid out in our first article:
- Credit metrics
- Legal and regulatory environment
- Online penetration and trust
- Current banking failure
Working down our list of criteria, we can create a matrix of which countries score high in each category. We’ll leave out countries like the US or UK that already have highly developed marketplace lending industries, and focus on those most likely to be ‘next.’
Orchard’s online lending ecosystem map for the US and the UK – both highly-developed markets
What countries have good credit infrastructure? Where is it the safest to lend? This is maybe the most difficult question – so many factors, from how to take liens on assets to inflation volatility, combine to create a good credit environment.
One high-level metric lenders can look at is the credit rating of the country as a whole. Bureaus such as Moody’s and Fitch provide frequently updated national ratings, from AAA (best) to C and DDD (worst.) These metrics are a good shorthand for how stable the country is (and whether it can make good on its national debts), but provide little information on how stable the credit market is within the country. For instance, Moody’s can tell you not to expand into a DDD country in the midst of a civil war, but not how to differentiate between the variety of B or A countries.
Fortunately, as part of its Doing Business Project, the World Bank in 2013 began tracking a novel metric: the depth of credit information index from 0 (low) to 8 (high.) This index ranks countries by how effective their domestic credit bureaus are at collecting actionable credit information. A similar ranking that can be used here is the World Bank’s ease of providing credit index.
Global depth of credit information index – darker countries have better credit bureau data available for underwriting, lighter countries have less data
Unsurprisingly, some of the highest-scoring countries tend to be those with already-developed marketplace lending ecosystems: the US, Germany, New Zealand… However, there are also many frontier markets that score highly: Armenia, which has “improved access to credit information by making it mandatory to gather and distribute information from financial institutions and utility companies,” and Rwanda (neither of which have native peer to peer lenders), Zambia (recently targeted by Zidisha, an MFI), Saudi Arabia (a possible target for Liwwa next door)… Though these markets are small compared to more mature, western economies, their wealth of public underwriting information makes them attractive targets for expansion.
Legal and regulatory environment
A second criterion relevant to a marketplace lender is the strength of the legal environment in a country they are expanding to. Can they reliably enforce repayment contracts with their borrowers? Do borrowers have robust bankruptcy protection? Can investors be held accountable for their commitments?
Similarly, its credit and underwriting infrastructure rankings, the World Bank has also developed a useful index for comparing countries across what it calls the “ease of doing business.” This ranking takes into account some factors not directly relevant to a prospective marketplace lender, such as the ease of dealing with construction permits or the level of entrepreneurial activity in the country.
However, the ranking also contains many relevant criteria:
- Protection of minority investors in a business (the debt and equity investors on a platform.) This gauges whether investors can legally recoup losses from, among other things, default and fraud. Some of the highest-scoring countries are not those you’d expect: Kazakhstan (3rd), Georgia (7th), Slovenia (9th)… the US is ranked comparably quite low, at 27th.
- Enforcing contracts. This measures the ability of a marketplace lender to ensure that both its borrowers and investors make good on their payment and repayment commitments. It reflects the time and cost needed on average to resolve a commercial dispute in court. Here again, many OECD high-income countries score highly, but eastern Europe also does surprisingly well, including Lithuania (6th), Croatia (7th), and Hungary (8th.)
- Resolving insolvency. The risk of bankruptcy exists on both sides of the marketplace – insolvent investors may not be able to make good on ongoing lending commitments, while insolvent borrowers cannot afford repayment. This ranking measures current domestic insolvency law and the bottleneck in pursuing claims against bankrupt parties. Some of the notable standouts here include Slovenia (12th), Cyprus (16th), and Thailand (23rd.)
Overall, outside of the mature marketplace lending geo’s (western Europe, the US, and Oceania), the markets poised for the next great expansion of peer to peer lending from a legal and regulatory standpoint lie in eastern Europe, central Asia, and the tiger economies.
Online penetration and trust
A lender is only as successful as the market it addresses. If a market is open, accessible, trustworthy, and popular, any lender that opens up shop will be able to quickly attract good customers and generate loans. In the case of banks and antiquated lenders, this meant a well-situated physical location in a prime, safe foot traffic area. For marketplace lenders, it means countries with high internet penetration and consumer trust.
Internet penetration varies widely globally and is a critical minimum requirement to establishing a base for marketplace lending. A variety of services – Nielsen, International Telecommunications Union, GfK – offer a consolidated look at which countries perform best in terms of how developed their internet ecosystems are. Ranked against each other, it’s immediately apparent that small, rich countries tend to have better internet penetration. However, these countries are usually too small (in terms of population) or too over-developed (in terms of an online lending ecosystem) to present attractive international expansion targets.
Interesting markets that fall outside of the mature lending ecosystems include:
- The middle east:
- Bahrain (18th in global rank) with a 90% internet penetration, 99% literacy, and a 1.3m population. (Its neighbor, the UAE, is home of the p2p lender Beehive.)
- Qatar (27th in global rank) with an 85% internet penetration, 96% literacy, and a 2.1m population.
- Eastern Europe:
- Kosovo (40th in global rank) with a 76% internet penetration, 92% literacy, and a 1.9m population.
- Slovakia (37th in global rank) and the Czech Republic (48th) – new markets, but already home to such lenders as Bondora, Finbee, Estateguru, Zlty Melon, Symcredit, and Zonky.
Current banking failure
Finally, a defining characteristic for an attractive international market is the robustness – or lack thereof – of the current banking system. If traditional lenders struggle to give credit to businesses and consumers, it paves the way for online lenders to establish a fast, firm toehold in those markets.
This characteristic is somewhat harder to measure, but one good heuristic that can be used is the average interest rate that a country’s bank offers its borrowers. Countries with higher commercial prime interest rates, which present worse borrowing environments, reflect a higher degree of risk in their target markets. However, this also provides an opening for marketplace lenders to undercut traditional lenders by introducing lower risk-adjusted pricing.
A snapshot view of countries with the most forbidding available interest rates shows that banks in underdeveloped economies, such as Madagascar, Malawi, and Laos, tend to offer high rates on loans (from 25% to 61% – compared with below 5% in the US.) Other countries working through turbulent recessions, such as Argentina and Brazil, suffer from similar high rates (from 26% to 33%.)
These astronomically high commercial prime rates demonstrate that credit is unstable in these geographies. This should be taken as a warning to any marketplace lender looking to expand to the region – defaults may be high, or credit indicators may be unreliable. However, for an online lender that can reasonably price risk on its loans or leverage new underwriting data unavailable to banks, these countries can also present enticing targets.
The second and third tiers
As the final installment of this post series on international marketplace lending expansion, we’ll look at which countries do not present attractive markets for near-term expansion. These fall into the 2nd (Dissimilar) and 3rd (Foreign) tiers discussed in the first installment. To better understand why they are not attractive markets, it’s important to also evaluate how and what they could change to improve their standing in the future. This will be the focus of our next post.