2. OVERVIEW: WHAT IS SPECIALTY LENDING?
Specialty finance, alternative lending, shadow banking, and internet enabled lending are a few of many
titles used to broadly define lending activities, primarily technology based, conducted outside the typical
banking system.
Digital enabled lending offers individuals an autonomized, technology driven approach to borrowing
and lending money. It’s through this marketplace that borrowers and lenders are digitally paired. The
borrower being an individual or small to medium sized business (SME), and the lender, a wide array of
capital providers.
The Internet is doing
to this industry what
it’s done to every
other industry —
create efficiencies,
competition and price
transparency
Although various forms of alternative finance have long
existed, they have become much more popular through
the wake of the 2008 financial crisis. Reconfigured
regulation, repurposing technological capabilities and
a shift in consumer perception towards certain banking
activities have been the driving force behind this
change.
Relative to the size of the overall unsecured lending
marketplace, these digital alternative lenders have
captured only a small percentage of market share to
date, leaving considerable room for growth. In this
paper we will explore the enabling factors that have
led to a rise in decentralized industry players and the
opportunity that has uncovered itself as a result.
“
”
Technology based
businesses have
the opportunity to
transform finance
over the next
generation
Larry Summers, Fortune,
April, 2015
“
”New York Times,
March 2014
3. CONTRIBUTING FACTORS
New regulations are playing an integral role in developing the digital lending marketplace and has paved the
way for new entrants and competition. A combination of factors including, but not limited to the Dodd Frank Wall
Street Reform (U.S.) and Basel III, have forced banks into tightening their product offerings to consumers and
small to medium sized businesses (SMEs). Thus driving clients into the arms of these new platforms.
REGULATION
This has led banks to pull back from dealing in
some areas such as loans to non-investment grade
companies.1
This has led to reduced credit availability in some
lending areas as it has made the cost of doing
business more expensive for regulated banks.1
Tightened Lending Requirements1
Scrutiny Surrounding High Risk Lending1
TECHNOLOGY
Technology, overall is best known for disrupting industries by taking a business model and redefining it with
efficiencies in cost and time. This could not be truer for the evolution of the specialty finance industry.
CHANGING DEMOGRAPHIC
• Convenience for the borrower
• The efficiencies of the system drives down
the operating costs, leaving room for
competitive interest rates to be passed on to
the end client
Over the past decade, the general population of the western world has welcomed a digital lifestyle with both arms
open. Increased online security standards and a cultural shift towards living professional and personal lives
online has created a need to seek the most convenient, technological way in which to live our lives.
Specialty finance lending offers simplicity and convenience to the application process and provides a safe,
familiar space for this activity.
• Big data analysis influences new ways of gauging
credit worthiness
• The use of advanced technology to automate
credit analysis, and processing has resulted in
quicker loan decision making
Silicon Valley
is coming after the
banking industry
“
”Jamie Dimon, CEO, JP Morgan Chase,
Fortune, April, 2015
4. MARKET SIZE & OPPORTUNITY FOR GROWTH
Currently, there is an estimated $3.2 trillion of consumer debt
in the U.S.2
(Chart 1). To date, only 1% 2
has been captured by
the digital lending market, yet these companies are growing at
an accelerated pace as both borrowers and investors recognize
the advantages relative to the traditional bank lending model3
(Chart 2).
The European alternative finance market has seen
significant growth in the past three years, from €487m
in 2012 to €2,957m in 2014, with an impressive
average growth rate of 146%.4
(Chart 3)
Alternative lenders approved 62%
of small business loan requests in
January 2015. This compares to big
banks which approved just 21%.
In a recent Fed survey which asked
why they were rejected, almost
45% replied that banks are just not
lending to their type of firm.1
Other Consumer
Student
Credit Card
Auto
$1.27 tn
$0.92 tn
$0.84 tn
$0.14 tn
THE ADDRESSABLE MARKET FOR
PEER TO PEER
LENDING IS CONSIDERABLE
$3.2 Trillion of US Consumer Debt
Chart 1
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
2010 2011 2012 2013 2014P
Personal Loans (1)
Small Business (2)
EXPONENTIAL GROWTH IN US ONLINE LENDING
Chart 2
EUROPEAN ALTERNATIVE FINANCE MARKET SIZE
AND GROWTH RATE 2012 - 2014 €M
Chart 3
3
4
2
2012 2013 2014
487m
1211m
2957m
149%
144%
Avergae Growth Rate 146%
EUROPEAN ALTERNATIVE FINANCE MARKET SIZE
AND GROWTH RATE 2012 - 2014 €M
5. BANK REALLOCATION OF CAPITAL IS CREATING
OPPORTUNITIES FOR ALTERNATIVE LENDERS
In both Europe and the U.K., SMEs find it increasingly challenging
to find available financing through the typical banking system
(Chart 5 & 6) Studies show that most managers of European
SMEs feel that the availability of bank loans have not improved
since the financial crisis, and may have even deteriorated or
worsened4
. Governments are aware of the funding gap and in
many instances are embracing these new lenders.
Recent figures show that the US, UK and China, represent the vast market share of the online lending market
totaling 96%7
, however these businesses are taking a foothold globally.2
Due to the traditional lenders
vacating this sector (Chart 4), talent
and proven management teams are
available and have formed alternative
finance businesses with significant
backing. Very attractive to this talent
and investors to the space are that,
unlike traditional brink-and-mortar
lenders, online specialty finance
companies have low overhead,
attractive margins and scalability.
Goldman Sachs estimates that just
between consumer loans and SME
lending outstanding, there is $387
billion ‘at risk’ of leaving the banking
system over the next 10 years.1
MARKET SIZE & OPPORTUNITY FOR GROWTH
P2P BUSINESS LENDING HAS TRIPLED SINCE
2013
P2P CONSUMER LENDING HAS SEEN RAPID
GROWTH
Chart 4
80%
85%
90%
95%
100%
105%
110%
2008 2009 2010 2011 2012 2013 2014
Personal Loans
Total Loans In Banking Industry
SMB Loans $100K - $1M
SME Loans < $100K
LendingClub, Prosper, Upstart Fundation, Funding Circle, Lending Club Ondeck, Can Capital, Kabbage
Significant Digitally Enabled Lenders:
Access to finance
remains one of
the most pressing
challenges facing
European SME’s
today
“
”
5
Chart 5 Chart 6
6 6
4
6. CONCLUSION
The digital enabled lending space is proving to be lucrative to sophisticated investors, which is helping
to fuel the growth in the sector. Funds are flowing from institutional investors into peer to peer consumer
loans, for example, leading to the creation of investment-grade asset classes being packaged and
financed in the traditional capital markets.4
Providers of capital to these non-bank lenders have an opportunity to capture attractive yields traditionally
made by the banking sector. Various forms of participation in this growth are occurring from private
equity providers used to finance working capital, to enablers of capital utilized for lending activity. The
latter being done via the purchase of these loans from the platform (packaged), or by structuring a debt
facility with prescribed terms and security.
Change is happening, the future looks bright and along with that comes opportunities for investment in
this emerging industry.
Next Edge Capital Corp.
1 Toronto Street, Suite 200
Toronto ON M5C 2V6
info@nextedgecapital.com
1. “The Future of Finance, The Rise of the new Shadow Bank, Part 1” Goldman Sachs, March 3rd
, 2015
2. “Peer-to-Peer Lending: Prospects and Pitfalls” Moody’s Investor Service, January 29th
, 2015
3. Victory Park Capital, September 2014
4. “Moving Mainstream, The European Alternative Finance Benchmarking Report”, Ernst & Young, February 2015
5. “Introduction to Alternative Lending”, Fundnation, March 19th
, 2015
6. “Understanding Alternative Finance, The UK Alternative Finance Industry Report 2014”, Nesta, November 2014
7. “Alternative Lending: A Regulatory approach to Peer-toPeer Lending”, Grant Thornton, 2014
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