The peer-to-peer lending industry was given a jolt of energy on a winter week in San Francisco earlier this year.
Gearing up for a potential IPO, the head of one of the biggest companies in the financial technology – fintech – space secured $200 million in funding for its push further into the financial sector.
Mike Cagney, chief executive of Social Finance (SoFi), hopes to shake-up the US lending market online. “This is the start of a fundamental shift in how people will shop for loans,” says Mike.
The funding round would help the company to diversify from its roots in student loans and into other areas of P2P finance.
Mike is just four years out of business school at Stanford in California, where he incubated SoFi. The company launched as an alternative to traditional banking in 2011 and was the first to offer refinancing of both federal and private student loans.
Market leaders in the fintech space – from Zopa to Lending Club and big fish like Apple – are revolutionizing financial services, disrupting areas such as payments, money transfers and SME loans.
Like SoFi’s chief a number of these disruptive companies are headed by business graduates. DoPay, Onfido and AMP Credit Technologies are all headed by business school alumni. And the founders of both Zopa and Lending Club have MBA degrees.
The success of SoFi illustrates the rapid evolution of the P2P lending sector in particular, which emerged to disrupt big banks by directly connecting borrowers with lenders and charging cheaper rates for both.
“Our ambition is to serve the needs of all small businesses in the UK,” says Thomas J Delucca, CEO of AMP Technologies and an MBA graduate of John's Graduate School of Business.
An alternative finance provider, AMP Technologies enables banks to lend money to small and micro-businesses. The platform leverages payment processing, data analytics and predictive modelling to help big banks, which often struggle to loan to start-ups because of a lack of SME credit history.
Thomas, a former manager and senior vice president at American Express and Planet Payment, says that AMP Technologies allows for more competitive pricing on transparent terms for business customers.
AMP Technologies and similar ventures are at the forefront of a technology-led revolution that is empowering consumers and other start-ups by making capital cheaper and easier to obtain.
New sources of finance, new forms of currency and new methods of payment to new customers are just some of the concepts being pioneered by innovative fintech groups.
In a sign of the excitement around fintech, one of the industry’s biggest companies, Lending Club – founded and led by an HEC Paris MBA – floated recently with a valuation of more than $5 billion.
SoFi’s latest financing round has drawn speculation of a potential second listing for the nascent P2P lending industry.
It recently recruited the head of the New York Stock Exchange and the founder of PayPal as advisers, as it seeks to expand beyond student loans into areas like mortgages and personal loans.
The San Francisco-based lender plans to bring the entire mortgage experience online and through smartphones and tablets. “The mortgage experience leaves much to be desired,” says Mike.
Since starting in this area of business last autumn SoFi has built a portfolio of around $100 million, offering mortgages of up to $5 million to about 20 US states.
Mike says that mortgage lending was once a draconian process where banks treated people like money launderers until they could prove otherwise. “I’m proud that we’ve turned this experience on its head,” he says.
SoFi has broken much ground in the lending market. The company sold the first securitisation of P2P loans to secure a credit rating in 2013.
Like SoFi, the biggest P2P lenders – Prosper and Lending Club – are based in the US. But there are many ambitious entrepreneurs trying to democratize financial services from across the Atlantic.
Zopa, the P2P financing platform, launched in the UK in 2005 in a barn in Buckinghamshire. The UK’s original P2P lender has helped more than 51,000 people to lend more than £770 million in loans.
Zopa has pioneered an online lending industry that is now worth more than $10 billion globally, according to figures from UK and US trade bodies
Giles Andrews, Zopa’s CEO and co-founder, who earned an MBA at INSEAD, says he created Zopa because he saw the potential to bring people together over the internet without having to go through a bank.
“This has prompted a revolution in the financial sector worldwide,” he says. He adds that he sees Zopa becoming “the norm” in lending, and compares the company to eBay, the online marketplace. “Peer-to-peer lending is certainly here to stay,” he says.
Zopa is based in London and Claire Cockerton, the CEO and founder of Innovate Finance, an independent membership organization that represents fintech across the UK, believes Britain is a hub for similar companies.
“The UK’s strength as a fintech hub is due to a range of factors – including access to capital, an advanced financial services sector and a technologically savvy customer base,” says Claire, an MBA graduate of Imperial College Business School.
AMP Technologies, which secured $5 million in a funding round from SBT Ventures last year, announced the launch of its UK credit service at a gala for the fintech sector in London organized by Innovate Finance.
DoPay, a cloud-based service that manages the payroll and cash management services of employers, was also launched at the conference.
Led by chief executive Hazim Medani, a graduate of Warwick Business School and former head of Accenture Financial Services and COO of Egypt’s Bank Of Alexandria, the company targets its services at the two billion people in the world who have jobs but no bank accounts.
Onfido, the UK’s fastest growing automated background checking company, announced it had raised $4.5 million from funds including Brightbridge Ventures – a £50 million fintech fund created by a former Google executive – to fuel its global expansion.
Co-founded by CEO Husayn Kassai, who studied at Oxford’s Saïd Business School, in the past year Onfido has signed up more than 400 clients – from SMEs to FTSE 100 companies – and has grown to carry out background checks in 28 countries.
Husayn says that the funding round will allow the company to further penetrate the US market, and to launch in more European countries later this year.
But critics have pointed out that the P2P lending market has been tested only in a low interest rate environment. They say that internet-based lending platforms are encouraging investors to offer risky financing to borrowers in return for potentially rich rewards.
However few would argue against the notion that innovation in financial services helps consumers and companies to access finance, and opens new markets to tap.
The financing round announced in San Francisco by SoFi is a signal that big business is beginning to think so too.