Six years ago, a throng of University of Oxford graduates spotted an opportunity they simply could not resist.
Peer-to-peer lending was emerging as a potential threat to the financial services sector, and with slick online systems, the three graduates thought they could shake things up.
By matching borrowers directly with lenders online, they could offer cheaper rates and quicker loans than banks, they reasoned.
Since founding their venture in 2010, Funding Circle has facilitated more than $2 billion in loans, expanding into the US, Germany, Spain and the Netherlands. It has also raised $270 million in venture capital, from funds that backed Facebook and Dropbox, securing a valuation of more than $1 billion.
“We’re just scratching the surface,” says Sam Hodges, the Stanford MBA who is co-founder and managing director of Funding Circle USA. “Small business lending is still very badly broken.”
Morgan Stanley reckons the global marketplace lending industry will be worth $290 billion by 2020. Yet, the bank notes marketplace lenders facilitated just 1% of unsecured US consumer loans in 2015.
The global P2P market has grown rapidly in recent years. Yet while they initially promised to “Uberize” parts of banks’ lending markets, these so-called “fintech” start-ups are now looking to team up with the institutions they claim to challenge — Goldman Sachs and Société Générale included.
In the past two years, Funding Circle has struck deals with Santander and Royal Bank of Scotland to target small British businesses.
“In some cases we go head to head with banks, but in some cases we do many services that banks aren’t able to do,” says Sam.
The entrepreneur joined Funding Circle after founding Endurance Lending Network, a San Francisco-based lender. The two merged in 2013, forming Funding Circle USA.
Sam hit on the idea while studying for an MBA at Stanford’s prestigious Graduate School of Business. “With classmates I invested [in] and built a network of gyms. But it was painful to get a loan — we applied to 90 lenders to get credit,” he says. “That drove me to start-up Funding Circle USA.”
As well as inspiration, the Stanford MBA program gave him a set of solid entrepreneurial skills, as well as leadership development, Sam says.
The P2P lending market is biggest in the US, led by companies Lending Club and Prosper Marketplace, but Sam faces a unique set of challenges. “The US regulatory market is more complex. There are 50 states and multiple federal regulators focused on different aspects of the business model,” he says.
Financial regulators are homing in on P2P lending platforms. The US Treasury Department this month warned that online lenders' business models may be fragile.
Increased interest from regulators was one reason for Funding Circle to launch the Marketplace Lending Association, a trade body, with Lending Club and Prosper, Sam admits. Combined, their voices will be louder, the reasoning goes.
The Stanford University engineering graduate cut his teeth at a slew of venture capital and investment firms in New York, San Francisco and Beijing, including SecondMarket, where he led business development. Previously, he also served as CEO of WorkingPoint, a Bay Area accounting group.
“I picked up a lot of skills that are directly relevant [to Funding Circle],” he says. “We were building something quickly with a high degree of passion.”
To its advocates, Funding Circle is in the vanguard of a fintech revolution that is helping small businesses borrow cash. Supporters of marketplace lending argue that traditional banking is ripe for disruption by a set of nimble new entrants employing digital technologies more effectively.
“There’s a lot of advantages,” says Sam, such as that P2P lenders do not need to hold regulatory capital, run physical branches or struggle with creaking legacy IT systems.
Yet to its critics, the market is encouraging investors to take risks for juicy returns. They believe the rapid growth of P2P lending could weaken the stability of the global financial system.
Sam, however, rebuffs this suggestion: “We think marketplace lending is much more stable than a traditional….Financial system. You don’t have a ‘too big to fail' phenomenon.”