Marketplace Lending Cumming & Johan (2019, Chapter 14) - PowerPoint Presentation

1. Marketplace LendingCumming & Johan (2019, Chapter 14)

2. What is Marketplace LendingMarketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionDefinitionPlatforms Marketplace lending refers to online lending from individuals to businesses. It has significantly grown in popularity around the world after the global financial crisis that spanned August 2007 to the latter part of 2009. Marketplace lenders offer fast access to loans without the use of traditional bank intermediaries. The platforms cheaply and efficiently connect borrowers and lenders, typically in exchange for a 1% borrowing fee.2

3. Marketplace Lending Platforms (1 of 2)Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionDefinitionPlatforms Some of the main marketplace lending platforms are listed in Table 14.1. Some platforms are focused on marketplace lending (e.g., Zencap), while other platforms enable a variety of different types of loans, including but not limited to person-to-person (P2P) loans. Some platforms offer fees as low as 0.5%, while others have fees as high as 10% depending on the loan size and business performance. See https://www.supermoney.com/marketplace-lending/Some platforms service entrepreneurs around the world, such as the Kiva which has a focus on developing regions around the world. Our discussion here is focused on marketplace lending, not P2P loans, for reasons explained in Chapter 1 of this book.3

4. Marketplace Lending Platforms (2 of 2)Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionDefinitionPlatforms Marketplace lending platforms enable businesses to borrow up to $500,000, or $1 million, or even $5 million, depending on the platform. See Table 14.1 next slide. Typically a business must have been operating for 6 months, and have $10,000 in revenues, and a suitable minimum credit score. However, there is a notable degree of variation across platforms.As at July 2019, in the U.S. nominal interest rates are normally at least 5%, but can be as high as 30%. Loan terms can range from a few months to over 10 years. Funding time is very quick. An application can take as little as 5 minutes to complete, and matches with potential lenders within seconds. https://www.top10bestbusinessloans.com/The platform is not the lender, but instead the platform connects the borrower (an entrepreneurial firm) with a number of possible individual lenders.4

5. Platform NameWebpageNominal YieldTotal InvestedCompanies FundedFounded / LaunchedNotable FeaturesAustralia      Society Onehttps://www.societyone.com.au/marketplace $600 million +24,000 +2012Australia’s first marketplace lender; expect to have done $1billion in loands by 2020Canada      Fund Throughhttps://www.fundthrough.com/   2014“FundThrough has since become the U.S. and Canada’s fastest-growing working capital solution, allowing business owners to access funds tied in outstanding receivables in the click of a button.“Lendifiedhttps://www.lendified.com/   2015Loans to Canadian businesses of up to $150,000Lending Loophttps://www.lendingloop.ca/Starts at 5.9%$Can 51 million 2014Borrow $1,000 to $50,000, no early repayment penalties; Ontario government contributed $3-million over two years to loans funded on Lending Loop’s platform, funds up to 10 per cent of small business loans, supporting funding of $30-million.Lendmarthttps://www.lendmart.com/   2016Quebec basedDeveloping Countries around the World      FIINCAhttps://finca.org  2.3 million19844.5 million women empowered, microfinance, donationsKivahttps://www.kiva.org $1.33 Billion3.3 million2005Operates in 78 countries, 18. Million lenders (loans start at $25), 96.8% repayment rate (it is a loan, not a donation)myC4Test.myc4.com €24,349,91420,4752006Africa; 1.9% average rate of return on investment, 5,894 investors from 120 countriesEstonia      Bondorahttps://www.bondora.com/en/marketplace-lendingApproximate average 11.6%€29+m72,558+ customers served2008€247M+ invested. €29M+ paid out in interest, suggests 11.6% rateLending Treehttps://www.lendingtree.com/   1998Loan amounts: $2K - $1M, Time in business: 12+ months, require $8K in monthly revenue, Minimum credit score: nonelendiohttps://lp.lendio.com/ $1.3 billion75,000 Loan amount: $1K - $5M; Time in business: 12+ months; $15K in monthly revenue; Minimum credit score: 580Ondeckhttps://www.ondeck.com/9.99% lowest possible$12 billion  Loan amount: $5K - $500K; Time in business: 12+ months; $10K in monthly revenue; Minimum credit score: 600; webpage features local pages for US, Canada, and AustraliaProsperhttps://www.prosper.com/Depends$15 billion (including P2P and Marketplace)943,6692005First P2P lending platform in the United StatesSoFihttps://www.sofi.com $40 billion700,000+2011Offers networking events and business coaching for entrepreneurs as well as loans5

6. FranceWebpageNominal YieldTotal InvestedCompanies FundedFounded / LaunchedNotable FeaturesFinexKap    2013Data from 2017Lendixhttps://en.lendix.com/   2014Data from 2017Unilendhttps://www.unilend.fr/ €33.9 million4392013 Lendospherehttps://www.lendosphere.com/  702014Dedicated to renewables and environment-friend projectsGermany      Lendicohttp://www.lendico.com   2013Launched first in Germany with loans €1,000 - €150,000; expanded into Spain, Poland, Austria, South Africa, the Netherlands and BrazilZencaphttps://www.zencap.de/6.85%€14 million414March 2014 – November 2015Acquired by Funding Circle in 2005Spain      Loan Bookhttps://www.loanbook.es/Rates 4.11% (A- rating, 362 dias) to 7.46 (B rating, 361 dias)  2012Rates quoted for examples posted on August 2, 2019; Loanbook raised capital for its operations from the UK equity crowdfunding page Crowdcube https://www.crowdcube.com/companies/loanbook/pitches/bwmGElSwitzerland      Lendhttps://lend.ch/en/nusiness-loan/Rates 3.50% to 12.90%  2016Terms in months possible for 12, 24, 35, 48, 60; rates quoted for 4 year termUnited Kingdom      Funding Circlehttps://www.fundingcircle.com/Rates start at 4.99%$10.2 billion72,0002010Acquired German based marketplace lender Zencap in 2015; also operational in the US, the UK, Germany, Spain, and the NetherlandsZopahttps://www.zopa.com/7.3%£4 billion‘hundreds of thousands‘2005£250 million interest collected; Offers a wide array of different lending products; marketplace lending is just one line of businessUnited States      Fundboxhttps://fundbox.com/  100,000+ Highlights on webpage partnerships with other service providers, including Intuit Quickbooks, FreshBooks, Xero, Harvest, Kashoo, invoiceasap, Jobber, eBillity, Zoho, Co and Co, eventbrite, Knowify, paidKabbagehttps://www.kabbage.com/ $7 billion185,000 Loan amount: $2K - $250K; Time in business: 12+ months; $4.2K in monthly revenue; Minimum credit score: noneLending Clubhttps://www.lendingclub.com/4.99% - 29.99%$50 billion + (including P2P and Marketplace)3 million +2010 P2P Only2014 Marketplace Lending4.99% to 29.99% for business loans of $500,000 to $500,000;Personal loans up to $40,000 rates between 6.95% to 35.89%6

7. Marketplace Lending Borrower Characteristics (1 of 5)Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionLoan Size and RatingsLoan TermsBorrower Details This section info from German Zencap platform (Table 14.1)The Zencap platform, based in Berlin, Germany, operated from March 2014 to November 2015 prior to its merger with the U.K. based platform FundingCircle. Lenders are presented with detailed financial information of borrowers, including an income statement and a balance sheet. Loans are secured against not only the assets of the business, but also a personal guarantee of the borrowers. Loans are possible only between €10,000 and €250,000. Zencap rates all of its loans as either A+, A, B, C, or C-. The interest rate is determined by Zencap. Zencap does extensive due diligence on firms prior to listing to mitigate adverse selection problems (Chapter 2). 7

8. Marketplace Lending Borrower Characteristics (2 of 5)Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionLoan Size and RatingsLoan TermsBorrower Details Zencap charges a 1% fee for its services, which applied only if loans are successfully fulfilled (fees are deducted from monthly installment payments).On Zencap, 23% of firms were able to raise all of the capital that they had desired, and the average capital raise was 58% relative to capital that was sought. These statistics imply that lenders carry out significant due diligence prior to investing.For the 414 businesses that borrowed through Zencap, the loans had the following characteristics. The number of lenders per loan was 85 on average (median is 77, minimum is 4, and maximum is 302). The average lender bid was €33,680 on average (median €29,450, minimum €400, and maximum €124,800). The principal amount actually borrowed was on average €72,184 (median €60,000, minimum €10,000, and maximum €250,000). Loan durations were between 6-60 months (average 34 months, median 36 months or 3 years). The nominal yield was on average 6.85% (median 6.57%, minimum 3.13%, and maximum 15.02%). 8

9. Marketplace Lending Borrower Characteristics (3 of 5)Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionLoan Size and RatingsLoan TermsBorrower DetailsVarious online resources explain types of business loans that are feasible with marketplace lending. For example, one popular US-based page https://www.top10bestbusinessloans.com/ explains thatbusinesses can obtain secured loans (by putting up collateral) for annual percentage rates that start at 6%; unsecured loans (with good credit scores) for annual percentage rates that start at 4%, lines of credit (for ongoing working capital expenses) starting at 9%, merchant cash advances (for business with good credit and low risk) starting at 20%, accounts receivable (for outstanding invoices, short term debts) starting at 3%, equipment loans (for equipment necessary to grow a business) starting at 6%, construction loans (expansion or new facility) starting at 2%, and invoice factoring (filing cash gaps) starting at 11%.9

10. Marketplace Lending Borrower Characteristics (4 of 5)Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionLoan Size and RatingsLoan TermsBorrower Details The 414 businesses on Zencap had the following characteristics:The range of employees was between 1and 300 (average 18 and median 10). Only 16% of these businesses had a female CEO. (And relatedly, 7% of lenders across all the 414 businesses were female, with the range between 0 to 24%.) The average business had assets of €808,571 (median €295,975, minimum €9,000, and maximum €14.6million). Profits ranges from -€346,300 to +€1,112,533 (median was €44,100 and average was €66,744).The Zencap platform assigned ratings of A+ to only 5% of the borrows, A to 21% of borrowers, B to 47% of borrowers, C to 23% of borrowers, and C- to 4% of borrowers. 10

11. Marketplace Lending Borrower Characteristics (5 of 5)Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionLoan Size and RatingsLoan TermsBorrower DetailsThe 414 businesses that borrowed from lenders through Zencap were in the following industries: Accommodation and food service activities 3%, Agriculture, forestry and fishing 2%, Arts, entertainment and recreation 0.1%, Construction 9%, Electricity, gas, steam and air conditioning supply 0.1%, Financial and insurance activities 3%, Human health and social work activities 6%, Information and communication 7%, Manufacturing 11%, Other 8 %, Other services activities 19%, Professional, scientific and technical activities 4%, Real estate activities 0.1%, Rental and leasing activities 2%, Transporting and storage 4%, Wholesale and retail trade, repair of motor vehicles and motorcycles 21%.The reasons the businesses borrowed through Zencap were provided as well: Asset purchases (12% of businesses), expansion / growth (46%), tax liability (2%), working capital (32%), and other reasons (8%).11

12. Which Loans Get Funded?Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionSimple Ratings versus Detailed Financial InformationDefault Rates and Returns to InvestorsCumming and Hornuf (2017) show that the vast majority (over 95%) of marketplace funding on Zencap comes within the first 20 days. Within the first 20 days, most of the funding comes within the first couple of days.Cumming and Hornuf (2017) further show that the Zepcap data strongly support for the importance of simple platform ratings affecting crowd investor investment decisions in terms of funding success and attracting more investors. Platform ratings are not correlated with income statement or balance sheet items. Income and balance sheet outcomes are likewise uncorrelated with borrower success in terms of getting fully funded loans, the time to filling a loan, and the number of borrowers. Smartphone usage and newsletters, as well as the presence of females, attracts more daily capital raises for borrowers, while contemporaneous competition from other borrowers lowers the amount any single borrow raises in a day. 12

13. Default Rates and Returns to Investors (1 of 2)Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionSimple Ratings versus Detailed Financial InformationDefault Rates and Returns to InvestorsCumming and Hornuf (2017) report information from Zencap at the time of its merger with Funding Circle 2015 that only 5 of 144 loans were in default. Funding Circle itself had previously been reported in the media to have default rates around 2.8%. To compare with P2P lending, Lending Club reports default rates of 1%-10% for risky borrowers, but the returns offered for riskier borrowers can be as high as 25%. Lending Club reports further that they turn down 90% of applications for borrowing from the population of individuals that would like to make use of the platform. Returns to marketplace lending investors have been reported at 5.8% on average after bad debts and feesThere are some differences depending on the platform. The platform Zopa was reported to inform investors to expect returns of 5.0-5.5% after bad debts and fees, with an average borrowing rate of 7.3%. Similarly, the median rate of return other reputable marketplace lending platforms like Lending Club has been reported at 5%. Further, Prosper reports a 3-10% median rate of return on depending on risk tolerance. 13

14. Default Rates and Returns to Investors (2 of 2)Marketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionSimple Ratings versus Detailed Financial InformationDefault Rates and Returns to InvestorsAdams (2018) presents data from Lending Club and Prosper, the two largest marketplace platforms in the U.S., and compares the rates used to those offered by credit cards (since the unsecured loan terms are similar). Adams concludes from the data that for most all credit ratings, interest rates paid through marketplace lending is substantially lower than that which is paid through credit cards.14Source: Adams (2018), for 2017Q4. See Adams for charts over earlier periods with similar differences between the three options.

15. Marketplace Lending versus BanksMarketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionBanks vs. Marketplace LendingMarketplace Lending and Entrepreneurship Marketplace lending grew dramatically after the global financial crisis that spanned August 2007 to the end of 2009. Empirical evidence is consistent with the view that banks and marketplace lenders are complements. 5 main reasons (offered by Cole et al. 2018): First, entrepreneurs that have fewer sources of potential capital are more likely to be subjected to hold up agency problems; see Chapter 2. Second, having capital from one source can serve as a form of external certification that enables capital more easily from another source. Third, multiple sources enable entrepreneurs to scale up their businesses more easily and grow. Fourth, the community in which an entrepreneur is based is richer if there are more entrepreneurs, which enables community entrepreneurial agglomeration in respect of more business opportunities, more entrepreneurship, and more sources of capital. Finally, when entrepreneurs seek capital, they typically approach multiple sources and are often turned down by one or more sources (Cosh et al., 2008); having multiple sources available thereby encourages more entrepreneurial activity than that which would otherwise be the case.15

16. Marketplace Lending and EntrepreneurshipMarketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionBanks vs. Marketplace LendingMarketplace Lending and Entrepreneurship Marketplace lending restrictions have been in place in the U.S. at different points in time, including Idaho, Indiana, Iowa, Maine, Mississippi, Nebraska, North Dakota and West Virginia. Those states have imposed restrictions on LendingClub and Prosper, some of which have since been relaxed (Idaho in 2015, Indiana in 2011, Mississippi in 2013, and Nebraska in 2015). Iowa is the only state that has continuously imposed restrictions on both LendingClub and Prosper. States impose restrictions through origination rebates, licensing restrictions, service reviews, enforcement actions, and several additional hurdles; see Cumming, McGowan, Farag, and Johan (2018). Cumming et al. (2018) statistically estimate that non-restricted metropolitan state areas (MSAs) had 120% more marketplace loans than restricted areas, and that a 10% increase in marketplace loans causes a 0.6% increase in new business establishments per capita in an MSA. These economic effects are more pronounced among smaller firms, and are not explained by confounding factors.But quality of entrepreneurship may have gone down.16

17. ConclusionMarketplace Lending PlatformsBorrower CharacteristicsWho Gets Funded?Real Effects of Marketplace LendingConclusionThis chapter introduced some of the main marketplace lending platforms in select countries. We explained how some of the platforms work in respect of doing due diligence on entrepreneurial firms, providing ratings on entrepreneurial firms, and the information disclosed on the platform. We also provided statistics on returns and default rates.A concern of marketplace lending is that lenders pay more attention to simple platform ratings than they do detailed borrower financial informationMarketplace lending has grown extensively since the global financial crisis. We reviewed evidence that shows that marketplace lenders operate within the entrepreneurial ecosystem, and on average work as a complement to, and not as a substitute for, traditional banks. Empirical evidence is strongly consistent with the view that marketplace lending spurs on entrepreneurial activity. 17