THE BUSINESS MODEL OF MARKETPLACE LENDING PLATFORMS
Let us examine how this logic relates to marketplace lending. If individual peers wish to borrow and lend between each other directly, they can always ask their friends and family to help them out.
This comes with several challenges: Because borrowers have only one or a few counterparties, lenders have a high credit risk in case the borrower defaults. As we saw in Figure 2.7, if one borrower can connect with many lenders, their credit exposure decreases rapidly. However, most borrowers have only a limited number of direct links with potential lenders. For this reason, it makes sense for them to build a large network to increase the number of peers they can borrow from. This is what a marketplace lending platform does: it collects information about borrowers and lenders and makes it easily searchable. It then sells this information or takes a cut from the transaction costs to fund its operations and make a profit. As a result, both lenders and borrowers have lower search costs and transaction costs. The platform also rates borrowers and sets interest rates for loan contracts, which decreases the bargaining cost of counterparties. It has in place a reliable infrastructure that allows counterparties to make payments and collect interest, and it stays on top of borrowers’ performance. Additional third-party infomediaries are part of this information supply chain: for example, the credit bureau that collects information about people’s credit, or the data mining company that analyzes data from a social network to derive alternative information about users. It is also easy to see how existing intermediary-oriented marketplaces can upgrade their operations and offer credit to their customers. In some instances, this has already taken place: Alibaba, for example, offers payment and investment products,15,16 Apple is offering a digital wallet.17 Facilitating transactions between peers is primarily an exercise in leveraging information about users in a network. Companies that already own an information value chain can make the jump to become peer-to-peer lenders relatively quickly.Some marketplace platforms started with the idea of replicating the corporate bond market for small borrowers, which is another reason we also call peer-to-peer lending marketplace lending. In a sense, the corporate bond market bears some similarities to marketplace lending. Companies can issue bonds in the market that interested investors can purchase. Rating agencies screen and rate these bonds, and a legal framework is in place that makes transactions and collections relatively straightforward. However, for lending between private parties and small enterprises, where the profits for facilitating transactions are much smaller, no bond market exists. No investment bank will go to the trouble of underwriting a corporate bond for a borrower who just needs a few thousand dollars. However, by using technology that drives down overhead, platforms can serve profitably as intermediaries between borrowers and lenders and facilitate even small loans.
All this may sound like the silver bullet for lenders, borrowers, and platforms: lenders can earn high interest rates by lending to counterparties that a central intelligence has rated. Instead of chasing after borrowers, the platform provides them with a dashboard that organizes their loans. Borrowers benefit as well: the platform gives them access to willing lenders who might provide lower interest rates than a bank, a credit card company, or a loan shark. Because platforms rely heavily on automation, their overhead is relatively modest. They can turn a profit by charging only a small fee or spread, so tiny that lenders and borrowers might not even notice it. Unfortunately, things are not so simple in the world of marketplace lending.
It might sound deceptively easy to build and maintain an information value chain, however, in borrowing and lending, organizing and making information accessible is hardly enough. Unique challenges exist for marketplace lending platforms. Table 2.3 lists some of them.
2.6
More on the topic THE BUSINESS MODEL OF MARKETPLACE LENDING PLATFORMS:
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- 13.6 The road forward
- GOOD IDEAS IN MARKETPLACE LENDING THAT MIGHT BE HERE TO STAY
- SPOTTING SIGNS OF TROUBLE ON THE HORIZON
- Contents
- THE RESPONSE OF BANKS TO ONLINE LENDING
- Preface
- For hundreds of years, credit has been a bricks-and-mortar business.
- FORCES OF COMPETITION IN THE DIGITAL AGE
- digital competencies