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As the UK alt lending industry matures, even the largest players are having to adjust their models to cope with changes in the broader economic environment.
In evidence of this, Zopa, the UK's oldest alt lender, has introduced a "waiting list" for new investors on its platform, AltFi News reports.
The list went live last Thursday, and applies to both institutional and individual investors. Zopa now has the option to temporarily suspend all new investment if the time it takes to lend out investors' money to borrowers — which it constantly monitors — becomes too long. Zopa said the measure was introduced to prioritize its existing investors' needs over onboarding new customers.
The move indicates that Zopa's borrower demand is not meeting investor supply. Zopa said it had a healthy February, with £81 million ($98 million) in loans originated, which marked an impressive 42% year-over-year (YoY) increase. That the company had to introduce an investor waiting list therefore suggests not that consumer demand is weakening, but rather that its investor supply is outstripping borrower demand. On the one hand, the latest incident suggests a longer-term problem — Zopa already temporarily suspended new investment in December — but on the other, it shows that investors have confidence in the lender.
Zopa might be an indicator of the state of the broader UK alt lending industry. We are likely to see more UK alt lenders confronted with investor supply that exceeds borrower demand, in large part because investors have grown much more comfortable investing via alt lenders as the industry has matured. In addition, investors are likely attracted to alt lenders because of the relatively high returns they offer in a low interest rate environment. As the Bank of England (BofE) doesn't seem likely to raise rates in the near future (from a current 0.25%), investor interest will probably continue to grow. As such, while we haven't yet seen Zopa's peers implementing similar measures or openly combating a supply-and-demand mismatch, it seems that more players will soon be faced with the same problem.
Small businesses represent 99% of US companies, 54% of total sales, and 55% of all jobs, according to the US Small Business Administration.
These businesses need capital in order to grow, but small businesses are underfunded — only half of small businesses with $100,000 to $1 million of annual revenue received at least some of the financing they applied for from large banks in late 2015. This is partially because banks have retreated from this segment because issuing loans to small businesses using the traditional underwriting model is expensive. This leaves a massive amount of unfulfilled loans that we estimate reached $96.5 billion in Q4 2015.
Alternative lending companies have stepped in to capitalize on the opportunity available in helping meet more small business' lending needs.Alternative small business lending platforms use machine learning and digital tools to extend credit to a wide array of small businesses quickly and efficiently, particularly to those that have been rejected by banks. Alternative small business lending companies provide digital platforms that connect small business borrowers to capital using nontraditional means.
We estimate that alternative small business lenders originated $5 billion and had a 4.3% share of the small business lending market in the US in 2015. But alternative small business lending platforms will originate $52 billion and gain a 20.7% share of the total market by 2020, driven by the continued growth of new players, increased borrower awareness and interest, and most importantly, major partnerships with big banks.
BI Intelligence, Business Insider's premium research service, has compiled a detailed report on small business alternative lending that analyzes the market opportunity for alternative lenders, forecasts the market share and volume growth of alternative lending platforms, profiles key players, and addresses the main industry risks.
Here are some key takeaways from the report:
Alternative lending platforms are in a position to capitalize on this underfunding and also take share from banks. These companies use machine learning and digital tools to extend credit to a wide array of small businesses quickly and efficiently. We estimate that alternative lending companies' share of the small business lending market in the US will reach 20.7% by 2020.
Alternative lenders are now partnering with banks and this will propel growth going forward. New lenders are finding opportunities to offer white-label services to major banks. We expect banking partnerships, like the one between JPMorgan and OnDeck, to add 7.7 percentage points to the alternative lending industry's market share by 2020.
A flurry of new lenders have entered the market, but it's still early innings. A handful of small business lenders, from Funding Circle to Credibly, have entered the market and this is creating challenges as customer acquisition costs rise and alternative lending companies struggle to differentiate themselves.
In full, the report:
Forecasts the market share and volume growth of the small business alternative lending sector, and breaks down the main growth drivers.
Explains why small businesses are underfunded, and quantifies the market opportunity for alternative lenders.
Defines the different types of platforms that alternative lenders employ, including their revenue models.
Lists the advantages and disadvantages that alternative lenders have compared to traditional players.
Overviews the key players in the industry and identifies their growth factors as well as the pain points limiting their growth.
Pinpoints the key risks that could undermine the success of alternative platforms
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