International Expansion, Part 3: Dissimilar Markets

International Expansion, Part 3: Dissimilar Markets

(Read part 2 here.) In our first two perspectives on peer to peer lender expansion into international geographies, we looked at metrics that marketplace lenders evaluate when expanding into ancillary Tier 1 (similar) markets. Expansion into new markets is a great way to diversify borrowers and potentially lower credit risk and market exposure. It also […]

International Expansion, Part 3: Dissimilar Markets

(Read part 2 here.)

In our first two perspectives on peer to peer lender expansion into international geographies, we looked at metrics that marketplace lenders evaluate when expanding into ancillary Tier 1 (similar) markets.

Expansion into new markets is a great way to diversify borrowers and potentially lower credit risk and market exposure. It also augments a lender’s customer base, which is important for continued growth. As Samir Desai, CEO of Funding Circle, commented when they moved into the US market by acquiring Endurance Lending Network, ““The market size in the UK alone has felt gigantic to us. That’s the reason why we haven’t had to go to other countries. We didn’t have to go to the U.S. but we felt it was a huge opportunity and are quite excited.”

Though there are numerous criteria relevant to choosing how to expand a lending business, the most important are 1) credit metrics, 2) legal and regulatory environment, 3) online penetration and trust, and 4) current banking failures. Careful consideration of these metrics can help strategic lenders grow their market and business responsibly. However, these evaluations are limited in their usefulness when looking at Tier 2 (dissimilar) and Tier 3 (foreign) markets. These types of markets vary considerably, but are consistent in that the above criteria either don’t exist for these types of countries, or just don’t do a good job predicting the environment.

Tier 2 Markets – Dissimilar

The markets that fall into the second tier show some familiarity to established markets – such as the US, UK, continental Europe, Australia, and New Zealand – but also vary significantly. One example dissimilar market that is beginning to see success in the online lending space is China.

China has consistently made international headlines for its online lending ecosystem due to numerous cases of fraud, poor credit, and investor losses. Here are some statistics that demonstrate the history of high-risk in the Chinese market:

  • $59 billion: The total amount of peer to peer lending capital raised from Chinese investors by early 2016.
  • 1 in 3: The proportion of online lenders that were forced to shut down due to problematic lending practices and fraud (1,000+ lenders of 3,600.)
  • 900,000: The number of investors who lost money to Ezubo, a Chinese lending platform that was hiding a ponzi scheme and lost over $7.4 billion of investor capital.
  • 400%: The rate of growth in the number of peer to peer lenders in China in 2013.

This scale of rapid growth, coupled with significant fraud and investor losses, makes China a very complicated and unappealing market for prospective lenders looking to grow internationally. These failures are mostly due to a weak and ambivalent regulatory environment in China. The meteoric rise of online companies has left the Chinese government playing catch-up in its establishment of commercial laws.

In response to these massive lender losses, the China Banking Regulatory Commission recently enforced limits on lending activity to limit investor losses. Individuals now can only borrow up to $150,000 from one of the nation’s remaining 2,349 online lenders. Lenders must also register federally to open their businesses. In addition, the government is pursuing and prosecuting fraudulent lenders who have tried to flee the country with investor capital.

Such uncertainty and regulatory failure make Tier 2 markets like China dangerous for international lenders. As evidenced by Uber’s battle with Didi Chuxing, in which Uber withdrew from the Chinese market due to fierce competition from the native player, international internet companies are at an inherent disadvantage to locals in China.

However, though it has seen turbulence, the top online lending companies in the Chinese market are hugely successful. Lufax, China’s biggest peer to peer lender recently announced that it is considering a $5 billion IPO raise above its latest $18.5 billion. This would make it over 10x as valuable as Lending Club, the most successful American lender, and the face of the industry in mature markets.

Lufax has seen success in part because of its partnership with successful, mature finance companies such as insurance giant Ping An in China. In the words of Lufax CEO Gregory Gibb referring to the IPO, “Whether it’s for supporting domestic growth or supporting, eventually, international moves…if you have that flexibility, it’s a good thing to have.”

Tier 3 Markets – Foreign

Finally, the last type of international markets for online lender expansion are Tier 3, or foreign, markets. These types of economies are largely asymmetrical to established western markets, which markes them difficult to interpret and dangerous to enter. A market may be considered foreign for a variety of reasons –

  • Political and economic conflict: Somalia is a great example of a country that, due to its precarious situation, is difficult for international expansion. The country’s government has been consistently struggling fighting vicious internal war with Al-Shabaab, a militant jihadist group that makes federal regulation impossible to enforce. As reflected in a comment from Liban Abdi Egal, the CEO of First Somalia Bank, “We have been collecting data in Somalia, and one of the things we realised was the lack of formal financial institutions. This led us to start thinking of opening a bank in Mogadishu.” The lack of a formal finance industry indicates that it is probably not yet possible to establish an online lending practice.
  • Lack of data: Lenders are heavily reliant on leveraging robust data – credit, personal background, financial, business performance, etc. – to accurately price risk for their investors. Many foreign markets just don’t compile data in a reliable, accessible manner that online lenders can use. However, some countries are starting to address this issue. India has recently started rolling out a national identification system through biometric verification to its 1 billion+ residents. Inspired by the success of that program, Russia, Morrocco, Algeria, and Tunisia are following its lead. However, these identification systems are just an early step towards creating reliable credit data – they are still too sparse to create predictive risk analytics.

  • Poor internet penetration: One last obstacle standing in the way of markets to foster a successful peer to peer lending ecosystem is the lack of online users who can invest and borrow from such a service. As the below image shows, in Afghanistan and most of sub-Saharan Africa, there are less than 7 internet users per 100 residents. As a result of unfamiliarity with online services, consumers also have less trust in placing their money with potentially fraudulent parties. As an example, in Thailand many consumers (70%+) prefer not to even use credit cards, because the process of making online claims in cases of fraud is significantly more onerous than in the US. This lack of internet penetration and trust of online companies makes Tier 3 markets unappetizing for internationally-expanding lenders.

 

 

These three posts should help clarify the obstacles and relevant considerations facing online lenders as they look to grow their market size and valuation. The attractive markets for expansion, which tend to contain local and international competition, are those that most closely resemble the mature, western markets that generated the online lending industry. Newer markets such as China show significant promise, but also contain sizable risks that are unfamiliar to countries with more stable regulatory ecosystems. And many economies are just not ready to cultivate a responsible, safe online lending industry.

In a follow-up article, we’ll look at some successful and less-successful examples of the three types of international expansion that lenders have pursued: acquisition, partnership, and native expansion.

Author:

Nik Milanović

Which countries are poised for the next great marketplace lending revolution?

Which countries are poised for the next great marketplace lending revolution?

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 […]

Which countries are poised for the next great marketplace lending revolution?

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:

    1. Tier One: Similar – stable, developed economies with robust credit infrastructure
    2. Tier Two: Dissimilar – either fast-developing economies with new but quickly maturing credit infrastructure or developed economies with very unique credit conditions
    3. 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.)

  1. 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.
  2. 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?
  3. 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?
  4. 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.

Author:

Nik Milanović

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.

Volumes: Monthly P2P, marketplace and alternative credit origination volumes

Volumes: Monthly P2P, marketplace and alternative credit origination volumes

Lending Times has started a new initiative of publishing monthly volumes of the P2P, marketplace, and alternative credit space. We believe that our volume report will be a proof of the industry’s transparency and will help promote our industry. The volume report will also help lenders stand to be more visible to potential investors and […]

Volumes: Monthly P2P, marketplace and alternative credit origination volumes

Lending Times has started a new initiative of publishing monthly volumes of the P2P, marketplace, and alternative credit space.

We believe that our volume report will be a proof of the industry’s transparency and will help promote our industry. The volume report will also help lenders stand to be more visible to potential investors and lending capital sources.

An excel file with the entire historic volume data is available for download here.

Firm Currency Country July 2016 August 2016
Arboribus EUR Spain                  535,690
Capital Match SGD Singapore               1,910,700               1,786,400
CreditGate24 USD Switzerland, Rüschlikon                  870,000
Crowdhouse USD Zurich, Switzerland               3,500,000
CrowdProperty GBP London, UK                  210,000
Dianrong.com RMB Shanghai, China         1,300,000,000         1,370,000,000
Fellow Finance EUR Helsinki, Finland               3,577,776               5,054,475
FinBee USD Vilnius, Lithuania                  320,640
Finexkap EUR Paris, France               3,067,736
Funding Societies USD Singapore                  200,000
GyanDhan USD Delhi, India               1,300,000               1,500,000
Investly EUR Estonia                  346,813                  347,047
Investly GBP UK, London                    29,668                    25,433
Lendahand EUR Netherlands, Rotterdam                  597,300                  584,000
Lendino DKK Danemark             33,089,000
Lendix EUR France               3,733,568               2,056,920
LoanZen.in USD India                    50,000                    99,000
Mintos EUR Riga, Latvia               7,142,272               9,283,736
Modalku USD Indonesia                  120,000
Money Thing GBP UK, London               3,030,416               3,545,418
MytripleA EUR Soria and Madrid, Spain                  548,100                  548,100
Ovation USD Austin, TX             26,098,914
Plataforma Grow.ly, S.L. EUR Spain, Madrid                  185,000  177,451
SAVY EUR Vilnius ,Lithuania                  259,800                  249,500
ThinCats UK GBP UK               4,726,000
Twino EUR Latvia               8,308,804
Validus Capital Pte Ltd SGD Singapore               1,465,000
Viventor EUR Riga, Latvia               1,242,270
Zltymelon.sk USD Czech and Slovak republics 124,575 195,585

Publishing volumes with Lending Times is free.

Lending Time’s focus is on accuracy. Therefore:

  1. We will publish the volumes on the 11th day of the following month. If the data is received later we will update the volume tables in an attempt for completeness.
  2. We will only publish numbers reported by the lenders themselves by email or on their websites.
  3. We are publishing all data in the original currency in order to avoid currency conversion effects on present and historical volumes.

To include your company’s volumes in the report please email us, preferably before the 10th of each month, the following information:

Company name
Country and City
Month
Currency
Volume ( in original currency)
(and optionally, the previous month’s volumes going back since company
creation)

Please send your information to volumes@lending-times.com