By Zenobia Sethna & Shrey Mehta, BLinC
In today’s world, the way most of us borrow money is by going to the bank, or any NBFC, filling out a lot of paperwork, putting up significant collateral, and praying repeatedly that the loan gets approved; at an exorbitant rate of interest way above the going rate. Similarly, the way most of us save money is by depositing money in a bank at an interest rate which barely beats inflation. Isn’t it ironic? The very same bank which lends you money at, say 16%, offers you only 10% on your deposits. This leaves the bank with a significant profit of 6%, which is more than enough to cover their expenses.
This is the way that things have always been going, until someone somewhere thought ‘Hey, why let the middleman (the bank) take such a big piece of the pie? Why not directly let the lender lend to the borrower at more attractive rates?’ And that is the basic idea which gave birth to debt crowd-funding. Investors (lenders) can directly interact with borrowers and decide rates which are satisfactory for both parties, with the marketplace taking a relatively small commission as opposed to banks and other NBFCs, which took a huge spread at the cost of the borrowers and lenders.
While crowd-funding is a relatively new concept taught in investment banking courses in India, it has reached great heights. In 2015, global crowd-funding is estimated to be worth $34.4 bn, which is more than the global VC market, pegged at $30 bn. Of this $34 bn, debt crowd-funding accounts for 73%, or $25.1 bn, making it the most popular method of crowd-funding.
The debt crowd-funding market was worth only about $3.4 bn in 2013, after which it grew by an astonishing 223% to $11.08 bn in 2014, and since then it is estimated to grow 126% to $25.1 billion for 2015. As the figures illustrate, not only is the debt crowd-funding market very huge, but it is set to become even huger and grow at rates which far outweigh any other industries.
Why is debt crowd-funding so successful across the globe? It is successful because it provides various benefits to both borrowers and lenders.
There are potentially lower fees through debt crowd-funding, as compared to taking loans from banks and other financial institutions. Also, borrowers can potentially get loans for lower interest rates than the prevailing rates in the market. Similarly, lenders can get higher interest rates on the amounts they invest. Not to forget, the entire process is very easy and convenient, and is a lot faster than traditional borrowing methods. As it happens in the real world and explained in school of investment banking, the element of defaults on loans cannot be ignored. Bearing this in mind, many sites have kept aside a separate provision to cover defaults, in the rare case that defaults take place. Lastly, debt crowd-funding websites have been around for quite some time, which means that there are many such sites which borrowers and lenders can make use of, to increase their chances of a successful transaction.
Why did the crowd-funding market grow so exponentially in 2014? The strong growth in 2014 was partly due to the rise of Asia as a major crowd-funding region. Asian crowd-funding volumes grew by a whooping 320%, to $3.4 billion raised. That puts the region slightly ahead of Europe ($3.26 billion) as the second-biggest region by crowd-funding volume. North America continued to lead the world in crowd-funding volumes, growing by 145 percent and raising a total of $9.46 billion. South America, Oceania and Africa grew 167%, 59% and 101% respectively.
As you’d expect, USA has the most established debt crowd-funding market, as compared to any other countries. In fact, 59% of global crowd-funding activity takes place in the US, making it the biggest player geographically. The biggest P2P lending site, LendingClub, too is American. In the crowd-funding space, there’s a lot more debt crowd-funding sites, as compared to equity crowd-funding sites – this is because equity crowd-funding platforms are subject to various legal regulations and financial reporting requirements.
So who are the biggest players in the US? Two of the biggest players not only in the US, but in the world, are LendingClub and Prosper.
LendingClub: It is the first P2P lending company to be publicly listed by registering its securities with the SEC and also to allow loan trading in the secondary market. As of June 30, 2015, the platform has originated $11.1 billion in loans. On December 10, 2014, the company raised almost $900 million in the largest U.S. Technology IPO of 2014. In fact, its current market cap is $5.51 bn (as of 10th November, 2015) and its revenue was 213 million USD (for the fiscal year ended December 31, 2014).
Prosper: Prosper Marketplace is America’s first peer-to-peer lending marketplace, with more than 2.2 million members and over $5 billion in funded loans.
It has raised $354 mn in 12 rounds of funding and has acquired BillGuard (a personal finance analytics company) and American HealthCare Lending ($21 mn) (a financial services company servicing healthcare providers and patients worldwide), both in 2015, and invested in Bottlenose in 2012.
Moving on to Europe, most of the top players come from the UK or Germany. Even within this, there’s deeper fragmentation, with most of UK’s crowd-funding activity originating from London. Thus the market is highly scattered, with the biggest European P2P Lending sites originating from the biggest countries in Europe.
1) FundingCircle: One of the biggest crowd-funding platforms in the U.K., Funding Circle has loaned £906 million to SMEs since its launch in August 2010. The U.K. government, already using the platform, will lend a total of £20 million to SMEs through it. Small businesses can seek loans ranging from £5,000 to £1 million from multiple crowdfunders. There are currently over 44,000 lenders registered on the website
2) Zopa: This London-based P2P lender offers loans of up to £10,000 where individual borrowers deal directly with lenders. Zopa categorizes borrowers based on their credit grades and lenders can offer terms and amount of money based on the category of the borrower.
3) Ratesetter: Also London-based, Ratesetter is the first to have introduced the concept of a “provision fund” into P2P lending. This fund is generated from borrowers’ payment of a “credit rate” fee and is used to diversify risk in the form of a reimbursement to lenders in the event of a late payment or payment default.
4) Auxmoney: Based in Dusseldorf, Germany, this peer-to-peer loan marketplace raised $12 million in funding just this March. It allows private consumers to get personal loans from private investors between €1,000 and €20,000. Over 11,000 projects, collectively valued at over €50 million, have been financed through this platform.
Like most concepts, debt crowd-funding too has a lot of potential in India. This is particularly because India has relatively higher interest rates compared to the rest of the world. Also, as discussed above, there’s huge spreads taken by the bank, giving low rates to lenders, but charging high rates to borrowers. In addition, many NBFCs offer loans at far higher rates than banks. This is why debt crowd-funding has a high scope of success in India, as there is a real need for this in the Indian economy.
So who are the biggest players in the debt crowd-funding space in India? Some of them are:
Faircent: Faircent is an Indian P2P Lending website, started in 2013. Faircent has raised $4.25 mn in 3 rounds of funding. Between August 2014 to August 2015, they have had over Rs 1.25 crore of money lent through the platform; over 12,500 borrowers and 2,500 lenders are registered on the platform, committing over Rs 2.6 crores. They also have a run rate of over Rs 40 lakh per month.
The company is targeting over Rs. 800-1000 crores of disbursement in the next three to four years. By 2016, the Indian loan market is expected to reach a size of Rs 21,980.6 billion with a CAGR of 18.7 per cent.
LendenClub: LendenClub is a peer to peer lending platform founded in 2014.It connects wealthy investors with creditworthy borrowers. The site has 254 registered lenders and 313 registered borrowers, with 0% of defaults.
iLend: iLend started with a Seed funding of 40 Lakh from Singapore based Angaros group. Dipamkara Web Ventures Pvt Ltd is the parent company
Dhanax: Dhanax provides loans for business use, focusing on small businesses. It provides loans based on financial strength of the firm and the ability to pay back the loans. They have funded over Rs. 10 crores of loans till date.
CapitalFloat: Capital Float is an online platform that provides working capital finance to SMEs in India. It has raised $16 mn of funding over 3 rounds.
What does the Future Hold?
Thus, debt crowd-funding, an already hugely successful phenomenon across the globe, has potential to continue registering triple digit growth, the way it has in the past. Developing economies, particularly Asia, have been growing at a huge rate, and are forecasted to continue the pace, as there is a real need for this in these areas.
This phenomenon of crowd-funding is a natural progression towards market efficiency, and is a thereby a force to be reckoned with. We will see many new types of players entering in the financial sector that we have not seen before. Many existing players will be forced to change their business models and undergo business analyst training while many proactive ones will ride the wave. Many niche sub-sectors will emerge (such as real estate crowd-funding).
Regulations will play a key role in shaping the speed of adoption in different countries. Countries such as the UK are leading the way in this regard and are more likely to set the guiding tone for regulating this industry.