I have been in London this week for our third annual LendIt Europe conference. In many ways this was the best event we have ever done – the speakers were excellent, everything was conveniently located on the same floor and the event ran smoothly.
We kicked things off with the CEO of Funding Circle, Samir Desai, giving the opening keynote for the second year in a row. He made an excellent case for why, despite all the challenges in 2016, we are about to enter a golden age for marketplace lending. He listed three mega-trends:
- Banks are pulling back from SME lending
- Investors are unable to generate yield from traditional investments.
- Internet marketplaces are disrupting many big industries.
Samir also pointed out the fact that marketplaces do not carry any systemic risk even at a very large scale. This is because there is no maturity transformation, the loan duration of the borrower and the investment horizon of the investor are perfectly matched. Also, there is no inherent leverage in the system – dollars are invested in a 1:1 way.
The P2PFA commissioned a report from Oxera on the economic impact of P2P lending which we covered earlier this week. We heard from Chris Woolard of the FCA who made it clear that they are working hard on getting the full authorizations done for the big P2P lending platforms but they are not quite there yet. He also said we should not be surprised that big commercial competitors (i.e. banks) have expressed concerns. The FCA needs to listen to their concerns but will only act if needed.
I chatted with Christine Farnish of the P2PFA where we discussed the very topic of FCA authorizations as well as the Innovative Finance ISA. Christine gave some background on why they commissioned the Oxera report and also gave us an update on membership. She hinted that after not adding any new members for a couple of years that may be changing soon.
Neil Rimer of Index Ventures shared what is important to VCs today – one of the key pieces is data. This is the big drawback with startups – they all start with zero data. He also said that entrepreneurs should be thinking about big markets, not niches. One of the interesting points he made was that we are not yet in the second wave of this industry – this is the time when incumbents start to react. But it is likely coming soon.
The next session was an all-star panel with the co-founders of the top five leading UK P2P lending platforms. There was general agreement that the previous government under David Cameron was much more friendly to Fintech than the new government, who have a lot on their plate now. It was interesting to hear that Zopa updated their credit model the day after Brexit in anticipation of a less favorable macro environment. A positive for the platforms was the reaction after the Bank of England rate cut. Many platforms such as LendInvest saw a record number of new retail investor signups as a result of this change. Funding Circle defended their track record on profitability saying that they believe this will be a 40% EBITBA business when they reach scale.
As always Cormac Leech, now with Victory Park, provided a data rich presentation. To said that total global originations for online lending in 2016 will be $300 billion with the lion’s share coming from China. He talked about the growth rates in the different regions with China also leading the way in percentage terms and interestingly Continental Europe the second fastest growing region. He also discussed real interest rates which have been negative in the US but sharply negative in the UK, leading to an unusually benign credit environment. He left us with his prediction that online consumer and SME lending could reach a 30-40% market share in the next 10 years.
In the afternoon we split into three tracks. Some of the highlights for me in these sessions was the securitization panel that discussed the two deals recently closed by Funding Circle and Zopa. The Kabbage/Santander chat was interesting to see how the pain points of large banks can be solved by online lenders – Santander needed help in their customer experience and getting their loan approvals down from a four week lead time. I also enjoyed John Goodall’s presentation talking about Landbay’s integration with Zoopla (the Zillow of the UK) bringing in a record number of real estate investors to the Landbay platform. I also managed to catch some of the PitchIt @ LendIt sessions: Kasko, Lenderwize, Selified and Lendingwell, all of which were quite good.
Day Two of LendIt Europe
I opened day two with the announcement of the first PitchIt @ LendIt Europe winner: Lendingwell. This was followed by a panel discussion I chaired on the US industry. We discussed a range of topics including the current VC environment, which has seen a drop of over 50% when it comes to Fintech investing. The bar is so much higher now than it was a year ago for online lending startups. SoFi was discussed, they have a securitization machine in place right now and are executing really well – seemingly unaffected by the downturn in the rest of the industry. Kathryn Petralia from Kabbage also said that as a balance sheet lender they have also been mostly unaffected by the downturn. Although they did recently shut down their consumer lending platform, Karrot, due to challenges in the capital markets. There was a lively discussion about Goldman Sachs and their new entry into online consumer lending with most panelists saying they think that Goldman will struggle with Marcus.
My partner, Jason Jones, chaired the next panel on how lending is impacting other areas of Fintech. The CEO of Monzo (a new digital bank) described the real problem with banks is that their customer experience is still pretty woeful. He then went on to describe the massive amount of data that is simply unused by large banks that could really improve their offerings. The CEO of iZettle (the UK equivalent of Square) talked about how they began cross selling their small business customers, first offering payments and then offering loans to businesses. Small business lending is a logical fit for them because they have the data including the cash flows of the business for underwriting.
The highlight of the day, indeed the entire conference in my opinion, was the presentation by Lord Adair Turner. He is the former head of the Financial Services Authority (the leading UK finance regulator – now the FCA) and he made very critical statements in February about the P2P lending industry that have been widely reported since then. In his presentation he clarified his remarks saying that they were taken out of context and he never meant to sound so negative on the industry. Since February, he has done some homework and he now says that it is quite possible that online direct lending can indeed make the economy safer.
Lord Turner now believes that P2P lenders can do lending at least as well as banks do and they have the added advantage of not doing maturity transformation making them inherently less risky. If the industry continues to grow this could make credit crunches less likely. He says it is very important that the industry keeps its simplicity and transparency and if is does that it could play a useful role in the future.
Following Lord Turner was Jaidev Janardana from Zopa who talked about the challenging year we have had in 2016. Originations were down in both the US and the UK in Q2 but this does not reflect the overall state of the industry. Many platforms have obsessed over origination numbers and it is important for platforms not to try to grow at all costs. The reality is that the outlook for the growth of the industry remains solid with consumer loan demand expected to continue to be strong well into the future.
KPMG and the University of Cambridge have partnered on a new global study that they released at LendIt. They have taken the results of all their 2015 studies and combined the highlights into one report. They reported data from 1,086 platforms worldwide that took part in their surveys. It was interesting to see that while China dominates the total origination numbers on a per capita basis the US is actually the world leader.
Rupert Taylor from AltFi Data discussed the importance of data transparency. While platforms like Zopa, Funding Circle and RateSetter all report loan level cash flows to independent third parties this is not typical of other platforms across the UK and Europe. The UK has the P2PFA that has set some useful standards for the industry and these standards, particularly when it comes to data transparency, should be incorporated throughout the world.
Rounding out the second morning was Rhydian Lewis from RateSetter. He talked about the cost that comes from having bank deposits guaranteed. P2P lending is not solving for a guarantee but gives investors the choice not to pay for the cost of absolute certainty. He then posed the question on whether this cost of certainty was good value.
In the afternoon we again split into three different tracks. One of the highlights for me was the Preparing for a Downturn panel, which was very well attended. Moderator Edward Lucas of The Economist led the discussion with risk executives from the major platforms. It was fascinating to hear about risk modeling and the failures that were made not just in 2007 and 2008 but in 2010 and 2011 when models were overly pessimistic. Zopa said that some of the richest data they have is from their declines just before the crisis.
There were many great sessions that I have not mentioned and I would have loved to have seen everything but it was not possible. We recorded all the morning sessions on the main stage as well as Track 2 in the afternoon sessions. These videos are on the LendIt website now. Also our Company Demo track ran all two days with some great presentations there and these are also on the LendIt video page.
Overall, the mood at the conference was a little different to previous years. While I wouldn’t call the mood gloomy I heard a lot of caution in many of my discussions as well as in the educational content. And that is not a bad thing. We have reached a new level of maturity it seems and that will serve us well in the year ahead.
I would like to say a special thanks to the P2PFA who have been a great partner for the second year in a row. And also thanks so much to the LendIt staff who have worked tirelessly over the past several months to make this conference such a success.