‘Marketplace Lending’ defined

Before we delve into the eagerly awaited Innovative Finance ISA coming April 6th it would be worthwhile explaining this term, ‘marketplace lending’.

In 2014 the Economist coined peer-to-peer lending ‘Banking without banks’, despite this sentiment being the vocal outcry of UK peer-to-peer platforms, it no longer rings true. Peer-to-peer lending used to be a two-sided network of lenders and borrowers; direct lending between ‘peers’. In 2015, 1,031 institutional funders were reported to have been involved in financing deals across UK alternative finance platforms. 45% of UK platforms reported institutional activity, compare to 28% in 2014. Nesta shed more light on this trend in their annual report.

Image 1: Nesta report: 2016

As you can see, this innovative asset class, “peer-to-peer” lending has become entrenched in institutional funding.

·         32% institutional funding P2P consumer lending

·         26% institutional funding P2P business lending (total)

·         25% institutional funding P2P business lending (real estate)

AltFi Data called this in Spring 2015, when they published statistics on institutional funding within the three largest UK platforms: Funding Circle, Zopa and RateSetter.

Image 2: AltFi Data: estimated aggregate institutional participation in Funding Circle, Zopa and RateSetter originated loans 2014 – April 2015


It is almost one year on, and evidently the darky grey line has continued to rise. What assertions can we draw? Well, as borrower numbers increase, lending institutions can facilitate the loans where retail investors can’t; there aren’t enough of them. With over 10,000 UK SMEs and 600 commercial property developments funded in 2015 (P2P business lending) it is no wonder institutional activity has become an underpinning feature of marketplace lending.

·         It took 490 P2P investors (avg) to fund a typical real estate loan of £522,333 (2015), demonstrating the volumes required to fund an average loan.

Also, the institutional grip on peer-to-peer consumer lending has become even tighter. UK consumer lending in P2P is still considered a retail investor’s game, but it was reported that institutional investment rose significantly towards the close of 2015, having had modest involvement at the beginning of the calendar year.

·         £288m was lent by institutional funders across consumer lending platforms in 2015 accounting for 32% of total market volumes.

More can be found on institutional activity in the Nesta report, page 40 onwards.

To reaffirm institutional funding of peer-to-peer loans, AltFi published stats on Funding Circle, who, by Autumn 2015, were funding whole loans preserved for institutional lenders (not retail investors) at a rate of 50% of total monthly loan volumes (see: July whole loans vs fractional loans graph 1).

Innovative Finance ISA (IFISA) will boost retail investor numbers 

 Now that peer-to-peer lending UK could be conceived as a “thing of the past”, having evolved into marketplace lending, we can assess the impact of the Innovative finance ISA on this now very much institutionally affected market.

The Innovative Finance ISA, or ‘peer-to-peer ISA’ as some are calling it, will allow retail investors, or retail savers to look for an alternative investment, to earn tax-free interest on their annual allowance of £15,240 in 2016. Investors can open an IFISA with a single P2P platform, investing their allowance, or accumulated allowances, to earn higher interest rates than those offered by the other two main ISA products: cash ISA and stocks & shares ISA. There are some complexities to this new ISA, so read ‘Innovative Finance ISA 2016: overview’ for a better understanding of how it works,

Peer-to-peer lending real estate platforms are reportedly lowering their minimum investment with the prospect if the new Innovative Finance ISA. An influx of retail investors will come onto the P2P market looking to ‘increase their exposure to the UK property market, not only owning their home, but also in other ways, such as investing through peer-to-peer lenders’ according to Guglielmo de Stefano of AltFi.

·         Real estate peer-to-peer platforms expect the IFISA to boost the market volume in 2016 by 51%. (Nesta report)

An influx of 405,000 new retail investors is expected this year in light of the introduction of the IFISA. Of 1,020 UK adults surveyed, 19% exclaimed they would open an ISA and start actively saving. An important thing to remember is that P2P lending is an alternative investment product, and not a savings product. Retail investors, savers, whatever they deem themselves, will not be covered by the FSCS if funds are lost.

To conclude, peer-to-peer lending has evolved into marketplace lending with institutional investing permeating the industry. The Innovative Finance ISA will stimulate retail savers and investors alike boosting the marketplace lending industry. With more retail investors coming onto the market what affect will this have on the dichotomy of institutional lenders and retail investors? 2016 will be a testing year for marketplace lending, and with only Zopa and RateSetter marketing their peer-to-peer ISA products how much of an impact will the Innovative Finance ISA actually have. 

Jordan is a FinTech enthusiast and co-founder of UK’s no.1 peer-to-peer lending comparison service, where the everyday person can research, compare and feel empowered to invest and earn more money on their money. Jordan@orcamoney.com, @orca_money, www.orcamoney.com 

“Up to 60% of banks’ retail profits could be lost by 2025 to nimble fintech firms”  according to the recent McKinsey 2015 Annual Review of Global Banking.

We caught up with Steven Kerr, Vice President, Credit Risk & Collections at Mogo Financial Technology Inc., a Canadian listed fintech firm, that not only is one of Canada's fastest growing financial technology companies, it was also recently selected as a finalist for the International FinTech Innovation Awards 2016 in the FinTech Marketing Category. Mogo has been recognized for its groundbreaking, national, millennials-and-money event series "Adulting 101". 

Steven is from Belfast, previously worked in Dublin with GE Money and moved to Vancouver in 2011. He has worked at Mogo for the last 3 years.

Fintech Ireland: What is Mogo all about?

Mogo: We are building a digital financial brand for the next generation of Canadians by offering convenience, transparency, and products that are designed to help consumers manage and stay in control of their financial health. We have over 180,000 members and we are growing fast, we’re using technology and design to build a digital experience that makes it easier for consumers to make smarter decisions about their money.

Fintech Ireland:  What makes you different from traditional banks?

Mogo: Unlike a bank, consumers can open a free MogoAccount 24/7 in about 3 minutes, whether it be at home on their computer, laptop or more likely on the go through their smartphones. This gives customers access to all of Mogo’s unique financial tools and content including their free credit score which is an important part of managing your financial health.

Fintech Ireland: We are seeing more and more companies saying that they are disrupting this banking space.  What are the strategic advantages for a business like Mogo versus banks?

Mogo:  This is all about disruption. The key strategic advantages of a fintech business like Mogo are:                                    

Fintech Ireland:  So what products do you offer, are you a deposit taking institution?

Mogo: No we are not a deposit taking institution.  As we like to say, we are not a bank by design.  However, we are looking to offer many of the same products that banks offer and will partner with banks where needed.  For instance, our new Platinum Prepaid Visa card, which is a smart mobile-first alternative to a chequing account, is tied to a mobile app, giving members responsive data to help them stay in control of their spending while avoiding overspending and fees.  For this product we have partnered with an issuing bank in Canada for some of the back-end servicing.   Importantly, we are focused on leveraging our technology platform to deliver a digital experience as well as our innovative product design and brand experience.  

We see Mogo’s products as a key part of a consumer’s financial wallet. In the 3 minutes it takes to open a MogoAccount, a member gains access to the full suite of Mogo benefits and products. MogoMoney has a full spectrum line of personal loans that can help a customer get out of debt sooner by rewarding good payments with even lower rates over time. This is part of Mogo’s innovative Level Up program and an example of our commitment to socially responsible finances.  The company is also focused on expanding beyond consumer lending and offering services such as the MogoMortgage.

Fintech Ireland:  Are you an alternative banking service or a technology firm?

Mogo: We are essentially leveraging our technology, innovative product design and unique brand to transform the way the next generation of consumers access and use financial products.  First and foremost it is about the digital financial platform here at Mogo that provides us some key advantages over a traditional bank, including; the flexibility to launch multiple new product lines all supported by our big data warehouse, next-gen decisioning platform and agile credit strategy that allows us to develop models and bring them to market at a speed the banks just can’t compete with. 

Fintech Ireland:  Give us an overview on the credit department at Mogo.

Mogo: Here at Mogo I would say that we have an obsessive approach to credit that borders on OCD! We have a great foundation based on our platform that combines a big data warehouse with latest machine learning software and a data science department focused on model development using both traditional and non-traditional data sources. We have a proven credit discipline given the funding for our loans comes from Fortress Investment Group, so despite extremely high growth we have managed the credit portfolio in line with strict performance benchmarks. This has produced an amazing level of granularity in portfolio management that supports the constant optimization of our credit strategies.

Fintech Ireland:  Tell us about the recent partnership you entered into with PostMedia?

Mogo: We couldn’t be more excited about this innovative partnership that we’ve struck with PostMedia. One of the biggest challenges for a company looking to disrupt the financial space is brand awareness and the cost it takes to acquire new members. With a minimum commitment of $50M in marketing spend over the next 3 years we now have access to PostMedia’s 200+ trusted brands, including most of the major local and national papers in Canada (both digital and print).  This gives us access to approx. 76% of English speaking Canadian adults which clearly moves us a lot closer to our goal of becoming the leading digital financial brand in Canada.

To learn more visit www.mogo.ca or follow us on Twitter https://twitter.com/mogomoney

At Fintech Ireland we are always on the look out for great fintech stories like this one about Mogo.  If you would like to get in touch to discuss something similar or contributing a post or commentary, please contact us at hello@fintechireland.com 

In a wide ranging speech made today by my former co-director Gareth Murphy, Director of Markets at the Central Bank of Ireland, Mr Murphy addressed a number of important issues, especially in the areas of financial innovation, digital currencies, fintech and regtech as he laid out his thoughts on 1) Culture and personal accountability, 2) Technology, 3) IT & Cyber Risk, 4) Disclosure of Investment Fund Fees, 5) Stress Testing of Investment Funds, 5) Data and data-driven supervision and 6) the Current Workload of ESMA's Investment Management Standing Committee (which Mr Murphy Chairs)

Rather than taking up space in this section by repeating the post on LinkedIN, I have included a link to my post here.  Note that my post doesn't intend to look at all points addressed by the Central Bank. Rather, I read through the speech to look for and extract novel and unique remarks on areas dealing with culture, technology and technology led supervision.

https://www.linkedin.com/pulse/supervision-ever-evolving-craft-hard-data-technical-peter-oakes