If the alternative finance industry is to realize its full potential, it needs to genuinely deliver on the promise of transparency, Rupert Taylor believes.
Mr. Taylor is the founder and CEO of AltFi Data, the leading independent analytics provider for the UK and European peer-to-peer, marketplace lending and equity crowdfunding industries. We spoke about AltFi Data Analytics, a market data product that allows the exploration and analysis of the data sets which make up the AltFi Data indices. Users can review verified data that represents originator track records to a consistent standard.
And there is plenty of data to view. AltFi Data offers origination data from 28 UK originators, with additional analysis looking at loan level data allowing for performance comparison of Zopa, Funding Circle, RateSetter and MarketInvoice, the four UK platforms which provide that level of data.
Mr. Taylor said marketplace lending is more than a disintermediated asset class – it is a disruptive new entrant gaining market share by offering a better value proposition than incumbent financial companies. But a better value proposition means lower margins with industry profitability relies on scale and true success on an Amazon-level of scale.
If that is to occur the industry needs to think differently, Mr. Taylor said.
“The ambition of this asset class needs to be bigger. In order to do that it needs to access more than just a specialist segment of the institutional marketplace or a specialist segment of the retail marketplace.”
You need to deliver a valuable offering to retail advisors directing FSAs and IRAs, and you can only access them if you allow them to credibly perform due diligence, Mr. Taylor added. And the technology is now available to allow them to quickly perform the apples to apples analysis of all relevant metrics which forms the cornerstone of due diligence.
There’s your value proposition.
Freed of many of the bricks and mortar costs which saddle traditional competitors, new companies glean valuable insights from both traditional and new data sources that kickstart the due diligence process.
Online originators are maximizing the benefit of their low cost online location to access new sources of data from the digital world to inform the credit decision making process. This represents a huge innovation in the way risk is priced. The challenge now is to apply the same innovation to the way data is used to distribute these assets to investors.
“The right model doesn’t involve the institutional investor duplicating that credit decision making process performed by the originator,” Mr. Taylor explained. “But investors can use verified data to understand the historic performance of the assets, and to identify originators that are prepared to use disclosure in a way that holds them to account for the quality of the loans they originate.”
Originators doing the legwork are more likely to attract significant institutional capital that can be passively allocated because of your transparent efforts.
“That’s what they should be doing well,” Mr. Taylor reasoned.
An originator participating in independent verification of their data is motivated to continue to source good and well-priced assets, because the track record is there, in a clear and concise format, for all to see.
But there’s little transparent about dumping megabytes of data on investors and thinking you can go to sleep at night with a clear conscience, not in the era with the data aggregation and interpretation capabilities of ours.
“Transparency is not an absolute,” Mr. Taylor said. “If data has not been verified and standardised it can make performance comparison more difficult.”
That is essentially a deceptive practice, one which Mr. Taylor credits the UK quartet, along with Prosper Marketplace in the United States, for avoiding. (Prosper Marketplace has recently signed on with AltFi Data.)
This added transparency is especially necessary now that marketplace lending is out of the novelty stage and beginning to scale, Mr. Taylor said. It is no longer enough for platforms to originate assets which were previously hard to access. Investors need to be able to definitively understand what return the assets have delivered historically and to identify originators that have an ongoing motivation to keep originating assets based on quality not quantity.
Once that nut is cracked, the next industry challenge is to communicate stability and profitability, one area where there are clear differences between the US and UK markets. Since Lending Club’s troubles, net lending numbers in North America are headed backwards, Mr. Taylor said. As loans made two and three years ago during a strong growth period get repaid, the change in outstanding principal is going in the wrong direction, lest new loan origination recovers. That requires improved investor confidence.
The UK market is much healthier in that regard, with record-breaking change in outstanding principal, and one reason is because it is more transparent, Mr. Taylor believes. That transparency increases a platform’s motivation to continue sourcing good loans because the data is clearly and simply there for all to see. (For a counter example, read The Big Short.)
Equally interesting is that Funding Circle, Zopa, MarketInvoice and RateSetter, the UK platforms that provide this enhanced disclosure, have gained market share relative to the rest of the market. Having represented 65% of UK market origination when they began to offer this disclosure, they now represent 75%.
AltFi Data’s approach is working, as they now have the attention of the patient, long-term capital that sees the value in originators who can demonstrate alignment, and performance data that allows for effective due diligence. Mr. Taylor said. And this is exactly the sort of capital that originators need to access to achive scale.
“If you show an institution verified disclosure to a consistent standard, they can still perform their own due diligence, but with AltFi Data doing 80 per cent of it, they can now do so efficiently.”