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Akkizidis Ioannis, Stagars Manuel. Marketplace Lending, Analysis Financial, and the Future of Credit: Integration, Profitability, and Risk Management. Wiley,2016. — 344 p.. 2016

While one of us has a strong background in financial risk and profitability analysis (Akkizidis) and the other is an economist who founded several startups (Stagars), it seemed natural to join forces and take a magnifying glass to the brave new FinTech sector that was just emerging at the time. We analyzed the scene in much detail, with a focus on marketplace lending, by exploring its lending business model both structurally and analytically. Would FinTech introduce innovation in the established processes of credit underwriting? How could we apply risk and profitability analysis using financial analytics to the emerging asset class of marketplace loans? Because we are in close contact with the financial sector that FinTech is trying to disrupt, drawing parallels between the two was a given. It became clear that both sides have much to learn from each other. FinTech companies have yet to catch up with the vast experience of banks in underwriting and managing credit. After a long hard look at the way banks cope with the emerging threat, it seems the financial sector might be in for a rude awakening unless they ramp up their capability to innovate in parallel with FinTech entrepreneurs. What can both sides do in this situation? In the quest to find answers to this question, this book came about. Thank you for reading it.

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Contents
Preface
Acknowledgments
About the Authors
About the Wbbsite
Introduction
Since the financial crisis in 2007/8, regulators and policy makers have focused most of their energy on strengthening the financial system.
WHO IS THIS BOOK FOR?
WHAT IS FINTECH?
WHY DOES THIS BOOK FOCUS ON ONLINE LENDING?
THE HYBRID FINANCIAL SECTOR: THE OPPORTUNITY TO BUILD A HEALTHIER FINANCIAL SYSTEM
One FinTech and the Online Lending Landscape—Where Are We Now?
1 Introduction to the Business Models in Financial Technology
Marketplace lending is but one of several approaches to online lending outside the estab­lished financial sector.
Innovation the mesin fintech
THE PROMISES AND PITFALLS OF FINTECH BUSINESS MODELS
The pit falls
CHALLENGES AND ROADBLOCKS FOR FINTECH COMPANIES
1.7 Concluding remarks
2 How Does Online Lending Wdrk? An Overview with a Focus on Marketplace Lending
Online lending has come a long way from its initially sketchy reputation.
RELIANCE ON TECHNOLOGY AND DATA
HOW DO ONLINE LENDERS DIFFER FROM BANKS?
TYPES OF ONLINE LENDERS
SOME BACKGROUND ON PEER-TO-PEER NETWORKS
THE BUSINESS MODEL OF MARKETPLACE LENDING PLATFORMS
ONBOARDING PROCESS
COMPARING MARKETPLACE LOANS WITH BANK CREDIT OR CREDIT CARD DEBT
WHO ARE THE ALTERNATIVE BORROWERS?
WHO ARE INVESTORS IN MARKETPLACE LOAMS?
UNDERWRITING AND CREDIT SCORING
REGULATION
THE RESPONSE OF BANKS TO ONLINE LENDING
2.13 Concluding remarks
3 What Made the Rise of Online Lending Possible?
There is a reason why financial technology startups are taking off now instead of 20 years ago.
TECHNOLOGICAL FACTORS
SOCIAL FACTORS
STRUCTURAL FACTORS
THE PERFECT STORM
CONCLUDING REMARKS
4 Why FinTech Lives Outside of Banks
Whenever a new FinTech service launches, the obvious first thing to do is to compare the new offering to those of the established financial sector.
THE TECHNOLOGY MUDSLIDE HYPOTHESIS: SUSTAINING INNOVATION VS. DISRUPTIVE INNOVATION
WILL BANKS NOTICE THE NEXT FINTECH BREAKTHROUGH?
WHY DO BANKS HAVE DIFFICULTY IN INNOVATING?
DEVELOPING CORE COMPETENCE IN FINANCIAL TECHNOLOGY INNOVATION
CONCLUDING REMARKS
Two The Status Quo of Analytics in the Financial Industry— The Perspective of Banks
The second part of this book is about the way that banks assess loan portfolios.
P2.1 BANKING IS INNOVATION
P2.2 BANKING GOES MOBILE
P2.3 BANKS ARE FAR FROM DEAD
P2.4 HOW TO READ THIS PART OF THE BOOK
P2.5 WHAT WE DISCUSS IN THIS PART
5 Financial Contracts
This chapter will describe the elements that banks need to considerin mapping and analyzing financial contracts.
CONTRACT ELEMENTS
TIME IN FINANCIAL CONTRACTS
CONTRACT MECHANISMS PRODUCING FINANCIAL EVENTS
CONCLUDING REMARKS
6 Markets
Banks differentiate between risk and uncertainty.
REAL-WORLD AND RISK-NEUTRAL EXPECTATIONS OF MARKETS
ECONOMIC SCENARIOS BASED ON REAL-WORLD PROBABILITIES
THE RISK-NEUTRAL EXPECTATIONS
BEYOND MARKET RISK-FREE RATES
DISCOUNTING CASH FLOWS
CONSIDERING MARKET ELEMENTS IN P2P FINANCE
CONCLUDING REMARKS
7 Counterparties
Afinancial contract is a pattern of promises between the counterparties.
TYPES AND ROLES OF COUNTERPARTIES
DESCRIPTIVE CHARACTERISTICS
DEFAULT PROBABILITY
CREDIT RATINGS
CREDIT SPREADS BASED ON REAL-WORLD PROBABILITIES
LINK OF COUNTERPARTIES VIA MARKETS
CONCLUDING REMARKS
8 Behavior Risk
As already discussed, financial contracts contain rules used to sufficiently extract the financial events given the actual and assumed market and counterparty conditions.
PREPAYMENTS
DRAW-DOWNS/REMAINING PRINCIPAL/FACILITIES AND CREDIT LINES
WITHDRAWALS
SELLING
DEFAULT AND DOWNGRADING
USE AT DEFAULT
RECOVERIES
CONCLUDING REMARKS
9 Credit Exposures
Investors, e.g., lenders, are exposed to the obligors, e.g., borrowers.
GROSS EXPOSURE
NET EXPOSURE
EVOLUTION OF THE GROSS AND NET EXPOSURES
EXPOSURE DISTRIBUTION
CREDIT LOSSES
LINK OF COUNTERPARTIES VIA CREDIT EXPOSURES
CONCLUDING REMARKS
10 Credit Enhancements
As we mentioned in Chapter 9, the status of a borrower and his contract is either “default” or “non-default.”
WHAT ARE CREDIT ENHANCEMENTS? TYPES AND STRUCTURE
ASSET-BASED CREDIT ENHANCEMENTS
COUNTERPARTY-BASED CREDIT ENHANCEMENTS
ADDITIONAL ELEMENTS CONSIDERED IN CREDIT ENHANCEMENTS
EXTENDING CREDIT ENHANCEMENTS IN MARKETPLACE LENDING
11 Systemic and Concentration Risks
Systemic and concentration risks play a significant role in the stability of the financial system.
CREDIT EXPOSURE SYSTEMIC RISK
COUNTERPARTY SYSTEMIC RISK
SYSTEMIC RISK EXPOSURES AND LOSSES
CREDIT EXPOSURE CONCENTRATION RISK
COUNTERPARTY CONCENTRATION RISK
SYSTEMIC RISK AND PORTFOLIO DIVERSIFICATION
Concluding remarks
12 Liquidity, Value, Income, Risk and New Production
So far, we have been exploring the input financial analysis elements, which are the market conditions, counterparty characteristics and behavioral assumptions.
LIQUIDITY
Value and income
New production
TREASURY AND FUNDS TRANSFER PRICING (FTP)
Toward the Future of the Hybrid Financial Sector
If a boom-to-bust expansion of consumer credit defined the last era in retail banking, a push toward digital will be the overarching theme of the current one.1
P3.1 DANGERS OF A BIG BANG APPROACH TO CATCH UP WITH TECHNOLOGY INNOVATION
P3.2 THE NEED TO COLLABORATE IN A HYBRID FINANCIAL SYSTEM
13 Profitability and Risk of Marketplace Loans
To understand marketplace lending better, we apply a banking risk-management approach to a portfolio of marketplace loans.
UNDERLYING ASSUMPTIONS OF THE ANALYSIS
RISK FACTORS
PORTFOLIO CONSTRUCTION
MODELING PORTFOLIO PERFORMANCE
RISK MANAGEMENT
13.6 The road forward
Concluding remarks
14 Digital Competencies and Digital Dilemmas
For hundreds of years, credit has been a bricks-and-mortar business.
digital competencies
DIGITAL DILEMMAS
Concluding remarks
15 Digital Strategy
By now, we have an overview of the operations of marketplace lending platforms and we have examined the inner workings of bank lending.
WHO NEEDS DIGITAL STRATEGY?
FRAMEWORKS TO ANALYZE THE IMPACT OF INNOVATION
SPOTTING SIGNS OF TROUBLE ON THE HORIZON
Howbankscanovercomethe INNOVATOR'S DILEMMA
FROM PRODUCER TO SUPPLIER AND MOVING TO A NEW SINGULARITY
FROM CLOSED INNOVATION TO OPEN SERVICES INNOVATION
THE ROLE OF LEADERSHIP IN DRIVING EMERGENT STRATEGY
Concluding remarks
16 The Hybrid Financial Sector
Instead of exclusively focusing on either the established banking sector or emerging lending platforms, when advocating a strategy to move into the future, we propose taking a different approach.
FORCES OF COMPETITION IN THE DIGITAL AGE
The danger sofknifefights
GOOD IDEAS IN MARKETPLACE LENDING THAT MIGHT BE HERE TO STAY
THE ALTERNATIVE TO THE HYBRID FINANCIAL SECTOR: A DOOMSDAY SCENARIO FOR ESTABLISHED BANKS?
Concluding remarks
7 Unified Analytics
Throughout this book, we have collected several puzzle pieces that describe the emerging FinTech sector, with a focus on marketplace lending.
WHY DO MARKETPLACE LENDING PLATFORMS NEED UNIFIED FINANCIAL ANALYTICS?
AN OVERVIEW OF A UNIFIED ANALYTICS PLATFORM
CONCLUDING REMARKS
Bibliography
Index
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