The excitement over alternative lending has finally flowed north of the border, as Borrowell, a Canadian marketplace lender, recently announced it secured $5.4 million in funding and commitments from, among others, Equitable Bank and noted Canadian investor John Bitove.
Borrowell was created by Canadian entrepreneur Andrew Graham. The Harvard MBA, most recently the Senior Director of Insurance at rapidly-growing Canadian consumer finance company President’s Choice Financial, also counts stints at George Weston Ltd, Canada’s largest food producer and distributor, and Nortel Networks on his resume.
Compared to the United States, the Canadian credit environment is much more homogeneous in terms of available consumer interest rates, and therein lies the opportunity, Mr. Graham said.
“In the U.S. there is more differentiated credit card pricing. In Canada almost everyone would have the same interest rate on a credit card, 20 percent for most up to 30 percent on store issue credit cards. That is one of the reasons why we think there is a big opportunity here. With almost everyone paying 20 percent there are a lot of people paying that rate who just do not deserve to pay it because they are not as risky as that rate would suggest.”
Canadian consumer borrowers owe approximately $1.5 trillion in consumer credit, with $1 trillion of that in mortgages, Mr. Graham said. Household debt to income ratios are also higher in Canada than they are down south, he added. Yet Canadians historically have lower delinquency rates in many credit areas than their American counterparts, with rates ranging between 50 and 70 percent of their southern neighbors. Their credit card debt to borrower is also a bit lower.
Compared to an American environment which is more used to and open to innovation, Borrowell knew they would be up against a more conservative environment in Canada, Mr. Graham acknowledged.
“Culturally there is more of a conservative nature when it comes to financial innovation and in many ways you can argue that’s good when you look at how banks came through the financial crisis,” Mr. Graham said. “If you look at rates of consumer defaults those are all good aspects. Canadians are less interested in experimenting as a whole. But once the product proves itself as being successful in Canada consumers are happy to switch.”
Andrew Moor, President and CEO of Equitable Bank, agrees the Canadian market is a more staid one.
“Compared to the U.S. banking market we are very concentrated. Six big banks essentially dominate the market. In that kind of landscape you don’t see the innovation you see in the United States and in other markets.”
Mr. Moor sees the same level of opportunity that Mr. Graham sees.
“This has been an overlooked opportunity in the Canadian market. We are trying to bring innovation to the space and peer-to-peer lending fits in well with our general mandate to shake up the marketplace a bit.”
Both Andrews see consumer education being key to Borrowell’s growth given the conservative Canadian environment and the simple fact few outside the financial sector know much about marketplace lending in Canada. For Mr. Graham, that process started with investors.
“Despite the success of alternative financing in the U.S. and elsewhere, not as many people had heard of it in Canada. Many people had heard of Lending Club, so when we explained the type of consumer we were intending to serve our investors got it very quickly.”
“It quickly became clear there was plenty of interest among investors in funding unsecured term loans for consumers with good credit scores.”
Andrew Moor agrees with Mr. Graham on the importance of education, and explains it does not stop with investors.
“There is a huge amount of education involved for the Canadian market. Nobody’s really aware of it in Canada. The only ones who are are working in financial services and seeing what is going on elsewhere.”
“It is definitely going to be pioneering from a consumer education standpoint. Canadians certainly trust banks which is a good thing for us (chuckles). Our banks generally did well in the crisis and are trusted by most consumers.”
Will Canadians be more welcoming or suspicious of marketplace lending?
“A bit of both,” Mr. Moor said. “Quite rightly there’s always suspicion of new business models until they see consumers get treated properly.
Borrowell will find the Canadian regulatory environment similar to the one in the United States, Mr. Graham said.
“The Canada regulatory environment works on a province by province basis like in United States. There are provincial rules we have to conform to around how we disclose interest rates, what we ask of consumers, and in other areas.”
“Because we are not a bank we are not regulated as one. We have to follow a different regulatory regime. The rules are manageable and we’ve invested the time and money to find solutions to them.”
As marketplace lending evolves in Canada, do not expect as many niche sectors to emerge, even though the needs are the same, Mr. Graham said.
“The United States has the advantage of scale. There’s more scope for niche businesses.”
“We don’t consider our business as a niche. We are focused on Canadians with good credit and good credit profiles. We think there are millions of Canadians who fit the profile of people paying more than they need to on the products they have.”
Andrew Graham cited several experiences in his business career which helped form what became Borrowell.
“When I was working at PC Financial we were an alternative to (Canada’s) Big Five banks, appealing to consumers who want choice and innovation in their financial services. Working there I saw innovation happening all over the world, especially in the US alternative lending sector. The more I looked at it the more I was convinced of the opportunity here.”
“It is a really interesting moment where technology is creating big change and big disruption in financial services and many opportunities are likely to come down the road as part of that.”
“Canadians are looking for financial products which bring ease, convenience and innovation to their lives. This is the reason I have such conviction about what we are doing.”