While the oldest P2P lending platform is Zopa from England, most of the biggest and fastest growing platforms are based in the US. The huge size of the US and its base of borrowers and lenders is part of the reason why, yet there are a couple things the US is doing for its P2P lending markets that Europe could look to implement to help them grow.
Here are 2 things the US does that Europe could do more of to increase their loan volumes.
As an industry, P2P Lending was founded as a way to use technology to fill in the gaps where banks used to lend but no longer do. That adversarial beginning has evolved to where banks are now partnering with peer lending platforms in the US as a way to do more business together in one of 3 ways.
1. Small local and regional banks, as well as big money center banks, will refer existing customers to a platform like Prosper and Prosper funds the loan with money from institutional investors and individuals like you and me.
2. These same banks will refer their customers to Prosper and use Prosper’s advanced, tech-based underwriting strategies but then fund the loan themselves through a whole loan purchase.
3. Lastly, the bank will agree to be an investor/lender on Prosper’s platform which may or may not include a right of first refusal on customers from their own bank. This allows the bank to buy any and all loans that hit their credit criteria and earn their Net Interest Margin.
Net Interest Margin is the difference between a bank’s own cost of funds and the interest rates where they lend their money and this spread is the single most important component to a bank’s profitability.
It’s a great feature of European P2P lending platforms that many are truly peer to peer with a heavy reliance on individual/retail money to fund their loans. Partnering with a bank in one of these 3 ways will help a European platform grow faster and more reliably.
Greater Small Business Focus
Most of Continental Europe’s best platforms including VIAINVEST are small Euro consumer loan platforms. Loans to small businesses on a P2P lending platform are tough to come by. It’s understandable as even with EU passports and a common currency, when it comes to a business that is registered in one country being funded with Euros from other countries, it is a more difficult process than a US business goes through where credit standards are the same all across the country.
The UK has the most P2P lending platforms for business with the leader being Funding Circle, who had a huge Q4 lending over 300 million GBP. They recently received a 40 million GBP investment from the state-owned British Business Bank just to make business loans to UK companies. There is also invoice financing (what we call factoring or receivables financing here in the US) led by UK based MarketInvoice.
Lendix is a French platform that makes medium term business loans.
Irish platform Linked Finance does small business loans in Ireland only and just signed a big deal with Eiffel Investment Group of France.
Since regulatory environments for businesses vary from EU member to member, cross-border lending for business can be a challenge for investors to analyze business credits from a different country. What Linked Finance is doing in Ireland may leave some clues on how European lenders can utilize P2P platforms to do more business like we do here in the States. They are lending only to Irish businesses since they can consistently underwrite for Irish based credit guidelines and get lenders comfortable with funding these loans. Would they be as good at underwriting a Belgian company? Probably not unless they hire that experience specifically.
The US uses the online marketplace for business loans, working capital/merchant cash advance, factoring and equipment finance. Lending Club is in this market in a big way, as is OnDeck, P2BInvestor, the US arm of Funding Circle, and Bluevine. The choices are varied and growing. These platforms along with doing larger consumer loans ($15,000-$40,000) are covering some small business needs for the solopreneur as well.
Europe’s platforms can originate and fund more loans while diversifying their base of investments for lenders by lending more to small businesses on the Continent.