This week, Crowdnetic and Thomson Reuters held their third annual event in support of market lending platforms (MLPs) and alternative finance. A few themes emerged from the event:
- Solving multiple issues: Through one-stop shopping for small and midsize businesses based upon collateralized products, such as inventory, receivables, and equipment financing, MLPs are looking to establish repeat business with clients, allowing them to monetize their assets. The goal is to establish a “lifetime” relationship based on trust with the investor/borrower.
- Focusing on profitability: Some MLPs are investing side by side with investors, targeting institutional investors, widening the product lineup, and forming joint ventures with peers and banks for improved products, financing, and investor/borrower acquisition. They are educating borrowers on the use of credit in their operations and industries. MLPs also generate revenue, such as reselling credit algorithms or using collected data to create a FICO score in China! Banks are collaborating versus competing or crushing.
- Strengthening the back office: Getting the loan servicing and collections as well as the compliance down makes a difference in the MLP’s reputation, client experience, and longevity.
- Bringing on the data: Good analytics improve credit underwriting and client pricing models. Few are shying away from multiple sources of data, and many are harnessing the power of social media inputs, evaluating the secondary markets on eBay for client products, or partnering with a consumer data firm for insight on market transactions and trends. Machine-learning algorithms were mentioned, as well as getting access to the borrower’s real-time business data and evaluating it daily for active lines of credit.
- Pursuing a secondary market: The great hurdle for MLPs is a functioning and strong secondary market in the form of securitization and investors’ resale of loans. Having the ability to unwind a position will mean greater interest in alternative finance. Some sense slowing institutional interest in light of this lack of evolution.
- Governments hit the “go” button: The U.K. and the Netherlands are investing in MLPs. A new EU initiative also promotes MLPs. Perceptions in Germany and Spain suggest regulations on MLPs are too strict … might we hear the echo of lobbying or future change?
- Snapshots of the cutting edge include the rise of vertical specialist MLPs that address a niche, such as manufacturing or medical; an MLP in China that broadcasts missed payments to borrowers’ social media identity as an incentive for repayment; an MLP that uses geophotos to evaluate a business; multiple government and university studies of the businesses pending over the next 12 months; a pending boom in Asia, as the Southeast Asia credit gap is estimated at US$300 billion; and the United States’ final rule on retail investor access (Title III) in late 2015. Many anticipate MLP market consolidation as well. For the future: a one-click 48-second approval via technology that pulls data without burdening the customer is envisioned.
Other announcements: Crowdnetic launched Marketplace Lending Gateway, a centralized technology platform connecting unserved loan applicants from banks and retailers to alternative funding sources through a real-time matching and allocation engine. Crowdnetic adopted Thomson Reuters Permanent Identifier (PermID) as its primary symbology system for the recording and tracking of crowdfunding transactions.
On September 30, the European Commission announced the Capital Markets Union (CMU) Action Plan to help build a true single market for capital across member states. Brussels stated that alternative sources of finance, complementary to bank financing and including crowdfunding, deserves a bigger role in financing for small and midsize businesses as well as startups. It also hopes to eliminate discriminatory cross-border taxes on investment by pension funds. Let the euro flows begin! (Pay attention, United States. The expiration of the U.S. Export-Import Bank this past summer isn’t your only miss.)