This is part 1 of a 2 part series on the Canadian marketplace lenders. In this series, you’ll learn about the state of lending in Canada and about the major marketplaces operating Canada.
What’s most interesting to me is that although marketplace lending is starting to become a global trend, each market has it’s own nuances. This is certainly the case I learned in Canada as I spoke to executives of several companies to learn about the challenges they face in their home market. Similar to Australia, there is an oligopoly of five stable, highly profitable banks that have between 70-80% of the market in Canada. One of the biggest challenges is consumer behavior, where consumers tend to be much stickier to the household names. The NPS score of these banks are not as low as in the U.S. The general positive attitude towards Canadian banks is partly due to the fact that Canadian banks were far less affected by the financial crisis.
This results in lack of competition to the banks, stagnant products, stifled innovation and high fees. Thus, the opportunity for these marketplaces is much larger. These new entrants must focus on educating consumers and offering them a superior product.
On the investor side, due to the regulatory environment in Canada, loans listed by any of these companies are not available to retail investors. For borrowers, the FICO credit score is based on a maximum of 900, not 850 as we have in the U.S. To give you a little perspective for comparison, a score of 690 in Canada would be equivalent to a 665 or 670 in the U.S.
As you’ll find out by reading about the biggest marketplace lenders in Canada, you’ll find that it is very much in its infancy in Canada with these lenders coming to life less than a year ago. They are several years behind the U.S. market. However, after talking with each company, it’s clear that the market opportunity large.
I spoke to Andrew Graham (CEO) and Eva Wong (COO) of Borrowell to learn more about their offering. Borrowell provides fixed-rate personal loans to borrowers and began originating March 31st of this year. Since then, they have received over $100 million (Canadian) in loan applications. They noted that they were excited and surprised about the amount of interest from consumers. Given the demand, they are still taking a thoughtful approach to underwriting and are very selective on the loans they’ve made.
They offer loans from $1,000 – $35,000 with rates from 5.6% APR to the mid-20s. Loan length is either 3 or 5 years, similar to what we see with Lending Club in the U.S. They also require a minimum credit history of 12 months and you must have reached the age of majority in the province you live in. Depending on the province, this is either 18 or 19 years old, which is common across the Canadian marketplaces. In addition, they have a minimum credit score requirement of 660, but as other online lenders do, look at income, current access to credit and current debt. Borrowell charges an origination fee which is between 1-5% of the loan amount. Net returns to investors has been in the high single digits.
When I asked them about the status of the Canadian market, Andrew likened it to being similar to online dating 10 years ago. There used to be a certain stigma to telling someone you met online. With that being said, they and other lenders are very focused on education. As I spoke to these companies it was interesting to hear about borrower acquisition in a market that is even less aware than what we have in the U.S.
Borrowell has been fortunate to get a lot of press and that has been a great source of leads. This is helping to legitimize the sector. In addition, they launched with Equitable, a large bank to invest in their loans. Equitable has also invested equity into the company. Other top investors include John Bitove, founder of the Toronto Raptors basketball team and Roger Martin, who in 2013 was ranked 3rd in the world’s most influential business thinkers by Forbes. Launching with a bank and these individuals has given them a sort a stamp of approval and legitimized what they’re doing.
When I asked what might surprise readers about the Canadian market, Andrew and Eva told me that many people would be surprised at how large the market is. People talk about marketplace lending in such places like New Zealand, but Canada has 10 times the population of New Zealand. They are looking at an addressable market of around $80 billion (~$61 billion USD) in credit card balances. If you look at consumer loans overall, it is well over $500 billion (~$380 billion USD), not including mortgages. Eva also pointed out that Canadians surpasses the U.S. in online internet usage penetration, making it more of an attractive market for online lending.
GroupLend launched as the first marketplace lender in Canada in October of 2014. GroupLend decided to launch their platform with one straight-forward product offering, but as I heard from Kevin Sandhu, their CEO, this will surely change over time. GroupLend offers fixed rate personal loans from $1,000 to $30,000 that start at 6.3% APR and go up to 17.5%. The low maximum rate is due to the borrowers that GroupLend is looking to attract. Much of the basic requirements are the same as other Canadian p2p lenders, but GroupLend requires a minimum FICO of 690 and an income of at least $30,000 (~$23,000 USD). All loans from GroupLend are amortized over 36 months. The target market is middle class, prime customers.
I asked Kevin if they will ever loosen up their criteria to attract more borrowers and he said they might dig a little bit deeper, but there is a hard line between prime and non-prime. He spoke to the 15 year housing boom in Canada which was not affected much by the recession, so debt levels are higher. Individuals are heavily levered up, and there is no underbanked. In addition, the average credit quality is much higher. These factors make Kevin believe that it’s a bigger gamble to get into the sub-prime market.
When I spoke to Kevin about some of the challenges, he said that many of the borrower acquisition strategies that are in use in the U.S. aren’t effective in Canada. Digital advertising, SEM, SEO simply do not convert as effectively. In addition, there are no Canadian equivalents to CreditKarma or LendingTree, so it has been challenging to get their name out. Kevin said that one key difference is that in Canada, banks are not shying away from lending. The marketplace lenders are not filling a void as much as they are creating a competitive product. To help drive borrowers, they have created exclusive partnerships with financial sales networks, insurance brokers, financial advisors. Through these exclusive channels, they hope to show that they have a genuinely superior product compared to the banks.
One of the most interesting things about GroupLend is the lack of an origination fee. There is also no pre-payment fees. In fact, the only fee I could find on their site for borrowers is a $50 fee if they attempt to process a monthly payment and it comes back NSF. I asked Kevin about this and he said the reason for this is to provide the best possible experience for the borrower.
He noted that origination fees can cause unnecessary friction as the net proceeds of a loan are lower than the loan amount requested due to origination fees. Say a borrower wants a loan for $10,000, they might only get $9,500 due to the origination fee taken off the top. This also causes confusion to the borrower of an interest rate versus the APR. This is why Grouplend has decided to only charge fees on the investor side. There are upfront fees for investors as well as a secondary ongoing loan servicing fees. These range from 1-5%, but the average is around the midpoint.
As for the future, Kevin mentioned several product expansion ideas. Besides the move to offering loans of 1 through 5 years, they aim to create a highly customizable product with fluid terms and launch it in the next couple of months. This fluid loan might work something like this. If a borrower is looking to buy a car and know they can afford a $400 per month payment, they can find the car and amortize it over a specific term, like 26 months. Products like these aren’t typical and are difficult from a systems, technology and accounting perspective, but the team at GroupLend has built this functionality out and looks forward to bring it to market.
Net returns to investors are in the high single digits around 7-9%, which given the lower interest rates seems quite attractive. Given the short amount of time they’ve been around, GroupLend is growing rapidly. They have received hundreds of millions in applications and total amount funded will soon hit $10 million. They are growing around 35%-40% month over month and are one of the major marketplaces in Canada.
You can read part two in this series, which features three more Canadian marketplace lenders. Two are small business lenders and the other is a platform that is going to be launching very soon.