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.


Nik Milanović