As technology continues to disrupt, transform, and enhance established industries like finance, education, and healthcare, we have tracked the resulting intersections and developments to better understand the different market landscapes.
Recently, we brought together leaders in the alternative finance market Al Goldstein (Founder and CEO, Avant), Rumi Morales (Executive Director, CME Ventures), Scott Rose (Leader, Chicago FinTech Hub), and Bob Rosenberg (Adjunct Professor of Entrepreneurship, University of Chicago Booth School of Business) for a series of talks, presentations, and panels to investigate emerging trends and the future of the industry, which we’ve broken down into several key insights.
An Overview of Alternative Finance in the Americas
In partnership with Cambridge University and with sponsorship from CME Group, the University of Chicago Booth School of Business and Bob Rosenberg fully analyzed the alternative finance landscape in the Breaking New Ground study, which produced three key findings.
First, alternative financing has grown by almost seven times over the past two years, from a total market size of $5B in 2013 to $36B in 2015. However, that still only makes up less than 2% of the overall lending market in the Americas. The United States is currently the largest player in alternative finance, making up 98% of the market.
What’s interesting about its growth is that women, minorities, and small and medium enterprises (SMEs) are participating at drastically higher numbers in this market than groups that are typically overrepresented in traditional models. For example, 42% of consumer borrowers are women, and 24% are SMEs.
Finally, the majority of this borrowing is happening in Marketplace/ Peer-to-Peer Consumer Lending and Balance Sheet Consumer Lending. While the peer-to-peer model is currently the most utilized, Bob Rosenberg pointed out that recent trends in investments, company growth, and industry growth overall suggest that “the market smiles on the platforms that hold the debt on their balance sheet.”
The Financial Crisis and Regulation Changed the Landscape
The financial crisis of 2007–2008 and subsequent regulation of the financial industry through the Dodd–Frank Wall Street Reform and Consumer Protection Act created large-scale opportunities for fintech companies to emerge and grow. As Bob Rosenberg stressed, “the sand in the gears produced by Dodd-Frank made it very difficult for banks to give loans,” allowing for peer-to-peer lending companies to service consumers when banks increasingly could not.
One such example is Avant, which formed in 2012 in response the heavily regulated loan environment by working with banks to provide consumer loans on their own balance sheet. In just four years, the company has grown from idea to $2.2B unicorn with $650M of institutional capital and 800 employees.
Banks Aren’t Going Anywhere
However, the growth of fintech and disruption of the financial industry does not signal an end to banks altogether. “Anybody in finance has a value. There is a fundamental human need to make money and protect it,” said CME Ventures Executive Director Rumi Morales, emphasizing that banks are the means of that protection. Even if the regulatory environment has thrown a wrench in how they traditionally operated before the financial crisis, they are still capable of innovating and finding new opportunities.
Bob Rosenberg stressed, “I don’t think banks are slow to the game. I think banks are smart. They’re going to find collaborations or partnerships or just be the provisioners of capital, to be relevant in this marketplace.” As the conduits of cash flow, banks control capital, and forming relationships with key alternative finance players like Avant to reach consumers and retain their relevance.
In a lot of ways, the current banking landscaping, especially in its relationship to lending platforms, whether they fall into the marketplace/P2P lending or balance sheet lending categories, has to the potential to look like that of the stock exchanges and emerging trading technologies years ago. They may even fall into the same patterns. As Scott Rose, Leader at Chicago’s new FinTech Hub, reminded, “the very first exchanges that [technologized] where the ones that did not have an established presence on the floor,” and ultimately strengthened their positions in a changing market while others did not.
Consolidation Is the Future
Throughout the various programs and discussions, Al Goldstein, Founder and CEO of Avant, named consolidation as the future of consumer lending. “Credit 2.0 look likes five to ten companies that have much better bank compliance in place, and more capital.” To get to that point, two things need to happen, and to a certain extent, have already started.
First, investors need to pick winners. When the idea of technologized lending from non-bank institutions first emerged, investors saw the market opportunity and began backing countless players. As a result, there are tens of thousands of SME entities in the U.S. alone. However, according to Al Goldstein, “it’s about having lots of capital and a big balance sheet,” to really win in this space, which means investors need to stop backing this fragmented ecosystem of platforms and get behind the handful best positioned to significantly penetrate the market.
Second, Al Goldstein adds, “you have to do it all […] be really good at credit and risk, services, capital, and compliance.” This may sound like a product of consolidation — and it can be — but it’s also its driver. If the big players can serve both the consumers and users accessing the product offerings and the banks serving as the cash flow in their various needs, then they can achieve the market penetration to take the top spots and allow for further consolidation.
Photo Credit via CloudSpotter