One of the most significant changes in the
European finance market over the last year has
been the advance of new market entrants in the
form of direct lending and marketplace lending
platforms. The size and sophistication of these
marketplace platforms is now beginning to have a
significant impact on the workings of the European
What is marketplace lending?
It is hard to find a strict definition for marketplace, lending
given the wide variety of entrants and financing techniques
involved. The principal characteristics of new marketplace
lenders, however, would include operating from a lending
platform outside a traditional bank lender; applying
technology to leverage and optimise the lending platform
and user experience; and connecting borrowers and lenders
through the platform rather than applying funding arising
from a wider deposit based relationship.
A wide range of marketplace
Marketplace lending is available to address most forms of
traditional bank funding products. Over recent months
products have included virtual credit cards, consumer loans,
student lending products, SME lending, residential property
and commercial property mortgage lending. It is likely that
the volume of lending in these product sectors as well as
further and additional product sectors will significantly
increase over the coming months, as financing becomes more
readily available to support the marketplace lending sector.
As discussed in the ‘Marketplace Lending’ panel at the 2016
Global ABS Conference, it is likely that these products
will further be supplemented with secondary market
trading platforms capable of trading individual or pools
of marketplace lending credit product, generating further
liquidity and reducing individual platform risk.
How are marketplace lending
platforms funding themselves?
Whilst marketplace lending often includes peer-to-peer type
structures, the increase in demand for credit through these
marketplace platforms requires larger pools of available
capital. Funding will now often be in the form of institutional
finance rather than individual investors on a traditional
Following the initial incorporation and start-up funding for
a new marketplace lending business, there will be a need to
establish funding lines which can accommodate growth of the
ongoing lending activities of the platform. Because the start-up
lender will not have an established track record, deposit base
or asset pools, we are typically seeing funding of the structure
follow the format of a warehouse securitisation structure.
Origination of new assets will be funded through drawings on
a note issuance facility backed by security over the new assets.
Each of the new assets will be subject to eligibility criteria
determined by reference to the nature of the underlying
asset. In order to provide an efficient financing structure the
assets will typically be held through an SPV with origination
and servicing provided by the marketplace lender. In order
to cover expected losses on the asset pool, the senior facility
will be subject to the lending platform maintaining sufficient
subordinated capital in the form of equity, or a combination of
equity and subordinated debt.
Whilst the funding may be structured through a revolving
loan or note programme, the tranching of the debt
will typically result in the platform satisfying the criteria
of a securitisation for the purposes of the EU Capital
Requirements Regulation, with the attendant requirements
to hold risk retention and provide appropriate reporting and
With online platforms often providing greater data
transparency and analytical attributes relative to traditional
credit providers, the reporting and disclosure requirements
will generally be less of an issue, although unique proprietary
characteristics of data analysis and credit scoring may be issues
that the developers of the platform are less willing to provide.
Why are marketplace lenders
achieving success in a difficult
Marketplace lenders provide a new and often fresh approach
to customer service, meeting the needs of consumers for
online access and rapid turnaround in the credit approval
process. New online lenders are looking to deliver credit
decisions in hours, rather than the days or weeks usually
required by traditional lenders. The new platforms also take
away the need for time-consuming physical meetings and
travel, providing consumers with direct access and contact
through their home computer or workplace.
Whilst concerns remain over the capitalision and resilience of
online and marketplace lenders in a severe credit downturn,
and traditional human risks such as fraud or bad behaviour
will continue, the fresh approach provided by these online
platforms is finding investment backing and customer appeal.
With leaner business structures and no legacy of expensive
historic liabilities for regulatory claims or expensive property
or technology infrastructure, these new platform models are
an exciting area in the development of the European finance
sector. Whilst regulators remain cautious of the new business
model, they do bring a new competition element to a staid
market and subject to managing their risk profiles adequately
appears to be the direction of future travel, either together
with traditional finance providers or in direct competition
with existing financial institutions.
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