Categories
News

UI Enlyte and Exaloan launch collaboration for digital loan refinancing

UI Enlyte and Exaloan launch collaboration for digital loan refinancing

  • The combination of Digital Assets and Digital Lending paves the way to Digital Financial Products 
  • Asset managers gain completely digital access to new asset class and can develop innovative investment concepts 
  • Loans and partial loan receivables can be traded in real time via the blockchain, creating a secondary market 

Frankfurt am Main, April 11th 2022. The two FinTechs Exaloan and UI Enlyte are launching a strategic cooperation and link their platforms for digital lending and digital assets. Asset managers and institutional investors using UI Enlyte’s platform will in the future have direct access to fintech lenders and loan originators through Exaloan’s analytics platform, enabling them to develop innovative investment products.

Exaloan has successfully operated the B2B marketplace Loansweeper since 2019 on which the company connects institutional capital with digital lending platforms. Loans issued by banks and lending platforms are made available to investors through a fully digital investment infrastructure. Already today, investors can use it to access different groups of loans such as SME or consumer loans worldwide. In addition, Exaloan provides real-time independent credit scoring using Big Data and machine learning, enabling investors to compare and fund loans across platforms. As a marketplace, Exaloan links lending platforms with institutional investors, opening up lending as a new asset class for investors. 

The UI Enlyte platform launched in December 2020 and is one of the world’s first end-to-end investment platforms for digital assets, providing fund initiators and institutional investors with regulatory compliant access to digital assets. As an independent technical platform, UI Enlyte is a pioneer in Europe, offering a holistic digital approach. All main phases of the investment process can be presented digitally on one platform: from onboarding, issuance and transaction of digital assets to administration and reporting. The issuance of so-called STOs, i.e. Security Token Offerings, is one of several product dimensions that will extend to digital funds in the future.


Great digitalization potential for global lending market

“We are currently witnessing a rapid shift of lending to businesses and households into digital channels. The potential here is huge, with the global lending market estimated to be worth a total of almost $140 trillion,” explains Luca Frignani, CEO and founder of Exaloan. Although the digital lending segment is still young, during the past year alone a loan volume of more than 20 billion euros has been granted to households and small and medium-sized enterprises in Europe. Investors benefit from higher spreads of five to 15 percent and short maturities. At the same time, they can incorporate clear sustainability (ESG) criteria into the financing process.

“Combining digital assets and digital lending digitizes the entire production chain from loan origination to investment opportunity, creating huge efficiency potential,” said Daniel Andemeskel, CEO and Co-Founder of UI Enlyte and Head of Innovation Management at Universal Investment, which is a leading European fund service platform and Super ManCos driver of UI Enlyte.

Through the new infrastructure, both whole and partial loan receivables can be funded and traded. This not only digitizes the entire funding process but also creates a secondary market for the loan receivables. “In addition to getting access to the asset class of digitally originated loans, investors also benefit from increased liquidity,” says Romy Ritter, COO of Exaloan. 

The newly developed infrastructure enables unprecedented transparency and tokenization down to the individual loans. “This is also a first step to build connected ecosystems, which is one of Enlyte’s main goals. To fully link both technology platforms in such a short time has been a tour de force of both teams,” said Khai-Uy Pham, CTO & Co-Founder of UI Enlyte.


Exploiting the potential of digital platforms together

As part of the cooperation, the respective strengths of the two partners can be fully leveraged as digital B2B platforms. “UI Enlyte is a perfect partner for us because their unique holistic approach allows them to digitally cover the entire asset management value chain, from onboarding new investors to issuing and administering digital assets to custody and wallets. In addition, as part of the Universal Investment Group, they have a broad network of asset managers and institutional investors,” Frignani said. 

“With Exaloan as a strategic partner, we can provide our clients with access to digitally issued loans as a very attractive investment. This will enable the creation of innovative investment strategies and investment products for this new asset class in the future. Exaloan creates real added value, particularly through increased transparency for investors, independent real-time credit scoring and extensive analytics capabilities, and consistently exploits the enormous potential for digitization in the lending market,” says Daniel Andemeskel. As part of the cooperation, both partners will in the future offer a comprehensive end-to-end infrastructure for issuing loans as digital loan tokens.

 

About Exaloan

Exaloan is the leading technology provider for institutional investments in digital loans. Its mission is to close the global funding gap for individuals, entrepreneurs and SMEs by connecting institutional capital with digital lending platforms. By operating a global B2B marketplace, the company opens up digital lending as a new asset class.. As an independent agent and validator, Exaloan provides a fully digital investment infrastructure with a standardized risk assessment of each single loan through its Loansweeper™ platform. At the core of its business, Exaloan uses big data and predictive analytics to generate an independent real time credit analysis as well as dedicated insights and reporting for institutional investors, banks, and lending platform partners. Insights cover topics such as sustainability reporting, advanced portfolio analytics, and market research.

Behind Exaloan stands an experienced team with extensive know-how in the areas of quantitative portfolio management, capital markets, machine learning, and software development.

 

 

About UI Enlyte

UI Enlyte is one of the world’s first end-to-end investment platforms for regulatory-compliant digital assets, based on the blockchain and meeting the quality requirements of institutional investors. Founded in 2020 by Universal Investment Group together with shareholder and CEO Daniel Andemeskel, the FinTech digitally maps all main phases of the investment process: from client onboarding, digital asset issuance and administration to reporting – all on one platform as a white-label solution. UI Enlyte offers institutional investors and fund initiators, as well as partners such as neo-brokers, customized solutions in five product dimensions: STOs for alternative assets, crypto custody, §284 funds with 20 percent crypto assets, the tokenization of fund units and, in the long term, the digital fund.

 

If you want to find out more, reach out to us.

We look forward to working with you!

Share it with your friends!

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print
Categories
News

Exaloan & Creditshelf: How digital SME lending adds value to an investor’s asset mix

Creditshelf & Exaloan: How digital SME lending adds value to an investor's asset mix

Frankfurt am Main, Germany, November 25, 2021 ‒ creditshelf Aktiengesellschaft, the leading financier for digital SME loans in Germany, and the data scientists at Exaloan AG confirm the added value of digital SME loans for the portfolios of institutional investors in a joint study.

 

Based on ECB data and the loan book of the creditshelf Loan Fund, the joint study elaborates the potential of the new asset class in the portfolio mix. Digital SME loans, such as those arranged by creditshelf’s lending platform, show a low correlation with other asset classes like equity, real estate, corporate or government bonds, and private equity. They are therefore ideally suited for further diversification of existing portfolios.


Dr. Tim Thabe, founding partner and CEO of creditshelf, explains: “We always knew that we are offering an attractive asset class for investors. Our new study with Exaloan officially confirms this. Especially companies of the German Mittelstand rarely have access to the capital markets and are therefore difficult to invest in by institutional investors. Through our platform, we offer a simple, digital and customizable way to invest directly into the German Mittelstand.”


In a volatility comparison, digital SME loans are significantly below other asset classes, even in comparison to a similar fixed income segment like corporate bonds. At the same time, they have much greater potential in terms of net returns. With the creditshelf Loan Fund portfolio, for example, the track record showed that investor returns amounted to up to 6% per year.


“We used bank lending data from the ECB to get a clearer picture of long-term return estimates for digital SME loans. When analyzing the data, we found that SME loans could be a great asset to include in an investor’s portfolio because they offer higher returns with a shorter duration than traditional fixed income securities like corporate bonds. By taking a close look at the creditshelf Loan Fund, we were able to validate our estimates with actual data. The study shows that institutional investors can benefit significantly from adding digital SME loans to their portfolio to enhance returns in a meaningful and stable way. Having the right tools to construct a diversified loan portfolio and control default risk is key, which is what our analytics engine is built for,” explains Luca Frignani, CEO and founding partner of Exaloan.

 

About Exaloan

Exaloan is the leading technology provider for institutional investments in digital loans. Its mission is to close the global funding gap for individuals, entrepreneurs and SMEs by connecting institutional capital with digital lending platforms. By operating a global B2B marketplace, the company opens up digital lending as a new asset class.. As an independent agent and validator, Exaloan provides a fully digital investment infrastructure with a standardized risk assessment of each single loan through its Loansweeper™ platform. At the core of its business, Exaloan uses big data and predictive analytics to generate an independent real time credit analysis as well as dedicated insights and reporting for institutional investors, banks, and lending platform partners. Insights cover topics such as sustainability reporting, advanced portfolio analytics, and market research.

Behind Exaloan stands an experienced team with extensive know-how in the areas of quantitative portfolio management, capital markets, machine learning, and software development.

 

 

About creditshelf

creditshelf is the leading financier for digital SME loans in Germany. Founded in 2014 and headquartered in Frankfurt am Main, the company arranges bank-independent, flexible financing solutions via a constantly growing network. creditshelf combines complementary needs: While SME entrepreneurs can easily access attractive financing alternatives, institutional investors can invest directly in German SMEs and partners can support their clients as innovative providers of new credit solutions. The core of creditshelf’s business model is a unique, data-driven risk analysis and unbureaucratic, fast and digital processes. Thereby, creditshelf covers the entire value chain: its platform is used to select suitable credit projects, analyze the creditworthiness of potential borrowers, and provide credit scoring as well as risk-adequate pricing. For these services creditshelf receives fees from both borrowers and investors.

 

creditshelf has been listed in the Prime Standard Segment of the Frankfurt Stock Exchange since 2018. The experts in the creditshelf team offer many years of experience in SME financing and are trusted partners and visionaries for the entrepreneurship of tomorrow.

 

 

 

To get access to the study please click the button down below or contact us directly at research@exaloan.com.

If you want to find out more, reach out to us.

We look forward to working with you!

Share it with your friends!

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print
Categories
Blog

Digital Finance: Driving Financial Inclusion in Africa | Part 2

Digital Finance: Driving Financial Inclusion in Africa | Part 2

In one of our last blogposts, we begin discussing the impact of the global digital lending industry on financial inclusion, based on the example of Africa. In this blog post, we will go more into detail exploring the different variations and business models that fall under the umbrella of Digital Lending.

The Digital Lending Landscape | Sub-Saharan Africa 

The visualization below shows three main lending models: Bank Originated Digital Lending, Balance Sheet Lending and Peer-to-Peer lending. We will explain these models based on their implementation in Africa and discuss how these models are linked to the development stage of the financial system and its African participants.

Source: based on FSI Insights on policy implementation No 27; Regulating fintech financing: digital banks and fintech platforms

Bank Originated Digital Lending entails banks partnering up with mobile service providers or startups to deliver their loans through digital channels. These offerings were the first to come to market, piggybacking off newly emerged mobile money systems and making use of established deposit-taking institutions. The first such lending scheme to emerge in Kenya was M-Shwari, a collaboration between the Commercial Bank of Kenya (CBK) and Safaricom, the provider of the M-Pesa mobile wallet. Bank-based digital lending is among the best-regulated form of digital lending in Africa since banks fall under the jurisdiction of local regulators.

Other players in the Sub-Saharan Digital Lending Ecosystem are Balance Sheet Lenders. They lend out proprietary funds acquired via capital or debt markets. This sector has grown significantly with notable players such as Branch and Tala, two Silicon Valley affiliated companies operating in Emerging Markets across the globe. Unlike banks these lenders do not take deposits and fall out of most of the traditional regulatory framework. These types of lenders have also been bogged down by controversy connected to the often extremely high interest rates that are not always communicated transparently to the borrowers (the Africa Report, 2021), prompting moves towards more regulatory scrutiny.

According to the 2nd Global Alternative Finance Market Benchmarking Report (2021), the global market share of Balance sheet consumer and business Lending in 2020 reached 36% of the estimated alternative finance loan volume, which amounted to more than 40 billion dollars.

Lastly the field of Peer-to-Peer Lending grew to become the dominant alternative lending model in Sub-Saharan Africa, reaching a total volume of 769 million in 2021, up by 50% from the previous year. A good example is Nigeria based Kiakia, which offers consumers both loans and investments. This field is however also quite dominant in the agricultural sphere, with offerings such as thriveagric or farmcrowdy allowing investors to finance the seeding stage which will be paid back with the harvest. In Sub-Saharan Africa P2P lending has become the dominant model in the alternative finance market.

The advantages of P2P lending are far-reaching: it does not only create more financing opportunities but also gives retail investors a good alternative to established asset classes, which are underdeveloped especially in the African context. It also enables to invest directly into the local economy. Most importantly perhaps, digital lending has proven to reach borrower segments that are excluded by traditional banks.

 

Market Share of Alternative lending products in Sub-Saharan Africa 2020 Source: The 2nd Global Alternative Finance Market Benchmarking Report (2021)

 

The advantages of P2P lending are far-reaching: it does not only create more financing opportunities but also gives retail investors a good alternative to established asset classes, which are underdeveloped especially in the African context. It also enables to invest directly into the local economy. Most importantly perhaps, digital lending has proven to reach borrower segments that are excluded by traditional banks.

 

Banking Status of Borrowers from Digital Lending Platforms across Regions (2020)

Source: The 2nd Global Alternative Finance Market Benchmarking Report (2021)

 

Currently relatively unconstrained by regulatory hurdles both balance sheet and peer-to-peer lending have shown double and even triple digit growth over the last few years. There are however still significant hurdles impeding market progress, most importantly a lack of transparency and comparability of the loan originators and the loans themselves. An investor willing to invest a large amount in the sector will invariably run into the problem that it is very difficult to assess the creditworthiness of companies and debtors from the outside. Furthermore, the availability of capital across lenders, but in particular in P2P lending, remains very limited. Nigerian lenders for example are currently only able to fund around 10% of eligible loans due to a lack of available funding. In 2020, the reported institutionalization rate on lending platforms stands at merely 30%. Although this is an increase compared to only 21% in 2019, bringing in cheaper money will likely be essential for sustainable growth.

 

Funding Source in Digital Lending in Sub-Saharan Africa 2020

Source: The 2nd Global Alternative Finance Market Benchmarking Report (2021)

 

In conclusion, new business models in digital lending hold great promise, especially in Africa, to improve financial inclusion. There are however still significant hurdles that need to be overcome before its full potential can be fulfilled.

At Exaloan we believe in the transformational power of technology to close the global financing gap. By providing a marketplace to connect Lending Platforms with Institutional Investors we aim to accelerate the transformation of the global financial lending markets toward more equitable and fair lending across the world – Including Africa.

 

 

 

If you want to find out more about our ecosystem, please reach out to us.

We look forward to working with you!

Share it with your friends!

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print
Categories
Blog

Digital Finance: Driving Financial Inclusion in Africa

Digital Finance: Driving Financial Inclusion in Africa

beach-3321713_19201

How digital Lending reaches previously underserved populations

Getting an overview over the fintech digital lending landscape can seem daunting and confusing, so we would like to use this blogpost to give an overview over the industry and how it has progressed in recent years based on its development in Africa.

 

 

Traditional lending by banks comes with high barriers for entry that has historically excluded large parts of the population. This is especially true in Africa, where for the longest time most people did not even have a bank account to deposit and transfer money. As the graph below shows, most countries in sub-Saharan countries had financial inclusion rates of less than 50% in 2011.

 

2011: Account ownership at a financial institution or with a mobile-money-service provider (% of population ages 15+)

 

Source: Demirguc-Kunt et al., 2018, Global Financial Inclusion Database, World Bank, last accessed: 6/17/2021, own visualization

\Note: the following countries have been excluded from the original visualization: Angola, Comoros, Djibouti, Burundi, and Sudan

 

Without formal employment or address and a credit history, traditional financial institutions are unwilling and unable to provide individuals or their informal businesses with credit. In developing economies, the first alternative lending models in the shape of microfinance institutions emerged in the 1970s. These institutions typically had a local focus and aimed to establish community-based lending behavior, that although it minimized default rates, was both high in costs and maintenance, and hardly scalable. As a result, thereof, large parts of the wider population in many countries remaining unbanked and without access to credit.

 

This only began to change with the emergence of mobile phone technologies in the 2010s. In the space of a few years the financial inclusion rate more than doubled in sub-Saharan Africa (Mastercard, 2020). With the introduction of M-Pesa in Kenya people suddenly had access to mobile wallets, first to send and receive money, but soon also to borrow. This development was not only limited to Africa: globally 1.2 billion adults have obtained an account since 2011, including 515 million since 2014. Between 2014 and 2017, the share of adults who have an account with a financial institution or through a mobile money service rose globally from 62% to 69%. In developing economies, the share rose from 54% to 63%. As the graph below shows, a large part of this growth was driven by mobile accounts, which grew disproportionately from 2014 to 2017 in many African countries.

 

Annualized growth of account ownership by type (% population age 15+) 

Source: Demirguc-Kunt et al., 2018, Global Financial Inclusion Database, World Bank, last accessed: 6/17/2021, own visualization

Note: the following countries have been excluded from the original visualization: Angola, Comoros, Djibouti, Burundi, and Sudan

New companies sprang up to capitalize on this growing trend, using data collected by users’ mobile phones to calculate default probabilities. Consumers previously excluded from accessing capital had the ability to quickly borrow money in emergencies or to fund and grow their businesses. The visualization below breaks down the regional allocation of mobile money accounts as a percentage of all accounts in 2017. One of the main drivers in Sub-Saharan Africa has been Kenya, which is also the first country to propose specific legislation to regulate Digital Lending companies.

2017: Account ownership at a financial institution or with a mobile-money-service provider (% of population ages 15+)
 

 

Source: Demirguc-Kunt et al., 2018, Global Financial Inclusion Database, World Bank, last accessed: 6/17/2021, own visualization

Note: the following countries have been excluded from the original visualization: Angola, Comoros, Djibouti, Burundi, and Sudan

 

Digital Lending as described above includes a host of different types of companies and business models. However, all share one common hurdle. Digital lending processes ultimately require digital funding processes to bring that market to scale, and many platforms lack the appropriate funding sources to fulfil the demand for credit. This is where Exaloan comes in by standardizing and automating digital funding processes for institutional investors and digital lending partners. If you are interested to know more, send us an email at info@exaloan.com and request a meeting or a demo.

If you want to find out more about our ecosystem, please reach out to us.

We look forward to working with you!

Share it with your friends!

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print
Categories
Blog

Sharia-Compliant Digital Lending

Sharia-Compliant Digital Lending

MicrosoftTeams-image (11)

With global mobility down and no prospects for physical experiences in foreign lands insight, we are taking a virtual trip towards the Global Middle East! Towards Islamic credit markets, and towards yet another exciting opportunity in digital lending!

A Brief Introduction to Sharia-Finance:

Islamic finance refers to how businesses and individuals raise capital in accordance with Sharia-law, a set of rules that comply with the Quran, the Sacred Scripture of the Muslim community. Key concepts include the avoidance of riba (usury) and gharar (ambiguity or deception). Money is seen as a representation of value, not an asset in itself, leading to the saying’ money cannot make money.

Therefore, simply lending capital with interest (and therefore for profit) is considered riba – and prohibited under Islamic law.

The concept of risk-sharing must be considered when raising capital in accordance with Sharia law. The Sharia-compliant product uses a bank fee rather than an interest payment structure while keeping product features very similar. Lending activities must happen within a banking framework in which the financial institution shares in the profit and loss of the loan it underwrites. To comply with the risk-sharing approach of Sharia-compliant lending, the Islamic bank may pool investors’ money and assume a share of the profits and losses.

Why Sharia-compliant Digital Lending?

As the Islamic Finance Marketing Experiment 2020 found, consumer preferences for Sharia-compliant lending products over conventional products are relatively un-elastic when it comes to religious borrowers. In a randomized experiment in Jordan, the researchers found that Sharia-compliance increased the application rate for loans from 18% to 22%, which equates to a 10% decrease in interest rates.

*Source: Islamic Finance Marketing Experiment 2020

These barriers add to the intrinsic dislike of conventional loans for religious borrowers. The findings suggest that religious considerations are partially responsible for the low utilization rate of household credit in developing countries with a large Muslim-population. High lending rates, an exclusive attitude, complicated procedures, and bureaucratic policies of traditional FIs are common obstacles reported by (M)SME when getting a loan. Muslim-majority countries have a 24% lower participation rate in active borrowing from banks (10.5% versus 7.9%) and a 29% lower rate of having a bank account (40.2% versus 28.6%).

Sharia-compliant digital lending products could not only lower access barriers to Islamic finance, but they could also contribute to mitigating the region’s financing gap, which sits at $335bn for South Asia and $186bn for the Middle East. Digitization could also propel Islamic finance’s growth in general, which is experiencing moderate to sluggish growth (1-2% in the next 2-3 years, S&P Moodys 2020).

Global investments in Islamic economy-relevant companies are already rising. In 2020, VC and other direct investments amounted to 11.8 billion dollars (Dinar Standard , 2019). Almost half of the investment volume, namely, USD 4.9bn, is invested in Islamic Fintech, highlighting the objective of putting technology-enabled finance to use to mitigate the historical slagging growth of Islamic Finance in MEASA.

Notably, the UK accounts for the most registered Islamic Fintech Firms with 27, followed by Malaysia, the UAE, and Indonesia (IFN Islamic Fintechs, 2021). A growing number of more than 120 Islamic fintech firms already offer Sharia-compliant financial products, many of them in the form of digital loans. Examples of Sharia-compliant digital lending platform include MicroLeaP (Malaysia), Dana Syriah (Indonesia), Nusa Kapital (Malaysia)…

Tradition meets Innovation: The Opportunity

According to Dubai International Financial Center (DIFC), Sharia-compliant assets currently represent 25% of banking assets in the Gulf Council Countries (GCC) and 14% of total banking assets in MEASA. Globally, Sharia-compliant AuM are expected to reach $3.8 trillion by 2023, almost doubling their 2020 volume of $2 trillion and growing at a CAGR of 10-12%.

The S&P Islamic Finance Outlook 2020 emphasized the need for inclusive standardization by relevant authorities and stakeholders to sped up Islamic finance advancement. It also hints at the role of Fintechs for supplying the necessary innovations with regards to products and technological infrastructure and for achieving a financial landscape that aligned with ESG objectives.

While market growth remains paced, it is gaining traction: Sharia-compliant digital lending operators in Indonesia have already doubled their Assets under Management between October 2019 and October 2020 (OJK, 2020). As recently as February 2021, the Bank Syariah Indonesia (BSI) was established after consolidating three state-owned banks. BSI has a net worth of $1.4 billion and works on the efficient integration of the three forming banks: Bank BRI Syariah, Bank Syariah Mandiri, and Bank BNI Syariah. The BSI shall allow platforms to better access credit scoring, e-KYC, and digital signature services. It will also integrate customer data from the forming three banks to help fintech companies partnering with BSI to offer services to its customers.

The digital lending market volume in the Middle East (MEA) has recently experienced impressive three-digit annual growth rates with complementing investments in several Arab lending platforms. Excluding Israel from the Middle East region, it is found that 95% of this digital lending volume stems from Debt-based instruments, roughly 5% from equity-based models, and 0.18% from non-investment models such as Waqf (donation)-based crowdlending (CCAF, 2019).

The biggest Sharia-compliant platform for SME lending in gulf countries is beehive, with approximately $170m in facilitated loans in 2020 (as of spring 2021). The platform recently partnered with government entities to roll-out a digital financing platform for micro and small Saudi Arabia enterprises. Across the UAE region, retail investors account for the dominant share of digital loan investments, with 90% against 10% institutional investors.

Another underlying driver is that since 2017, Islam is the fastest-growing religion in the world. It is already the second-largest religion after Christianity, and by 2025, approximately 30% of the global population will be Muslims. Sharia-compliant lending platforms are not only rolling-out products that their customers desire. They are entering an underserved growth market, while also captivating the general socially responsible investors and borrowers due to an emphasis on fair and equitable treatment of counterparties in the financing agreements.

We at Exaloan are excited to see where the market is headed! If you are interested in country-specific details, please contact research@exaloan.com.

 

Further Read / Interesting sources:

If you want to find out more about our ecosystem, please reach out to us.

We look forward to working with you!

Share it with your friends!

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print
Categories
Blog

Credit Rating Agencies in Digital Lending

Credit Rating Agencies in Digital Lending

One of the fundamental issues for investing in digital lending stems from a lack of standardization and transparency in the market. Fragmented into hundreds of lending platforms, with equally many rating methodologies and rates, comparability among investment opportunities is a nightmare. Furthermore, lending platforms typically act as loan originators, brokers, and rating agencies at the same time. It’s an encompassing business model that has enabled digital lending to scale up rapidly, but it also creates an array of problems:

Crooked incentives

Agency problems root in the fact, that digital lending platforms benefit from scaling loan originating. A recurring feature of the digital lending market as of now is an excess demand for credit compared to available financing volumes . A common problem with platform business is balancing two sides of one coin: in this case supply of financing with demand for credit. With credit being a function of capital available, the incentive to jack up interest rates to attract and retain investors is imminent.

In the long-run, the resulting problems are various: painful interest obligations for borrowers, adverse selection of the crowd, the threat of sliding into bad credit segments, a weakened competitive position, and high risks for the lending platform’s longevity.  

In traditional fixed income markets, agency problems are mitigated by having not the originator, but an independent rating agency assesses the creditworthiness of the borrower.

So much for (resolving) agency problems.

Intransparency

Another problem is information asymmetries. Who’s to say the credit score assigned to the loans is trustworthy? One might argue, that if platform A’s rating cannot be trusted, one can always pivot to platform B. Bad for platform A. And a cumbersome and annoying process for the investor. And then again, how will she compare her investment opportunities if each platform has a unique rating scale and methodology to assess risk? How is she going to decide? Trial and Error? Seems unsustainable.

The lack of transparency, comparability, and standards in digital lending represents an enormous hurdle for investors. It also puts a ceiling on the industry as a whole with respect to cross-platform investments, scalability, and further institutionalization. Without a unified credit score, the comparability of investment quality across platforms is a nightmare. The problem is only amplified regarding investments across markets.

In traditional fixed income markets, these information asymmetries between borrowers and investors are mitigated by independent rating agencies. In an independent assessment, a unified score is derived that enables the investor to compare and select amongst various investment opportunities. The rating assigned thereby shows an agency’s level of confidence that the borrower will meet its debt obligations as previously agreed. Some risk and uncertainty always remain, and investors are obliged to trust the agency and the results of its assessment. But having a third-party validator is best practice. Most of all it is helpful in creating more liquidity.

So much for (resolving) information asymmetries.

Why don’t we have an independent rating agency in digital lending?

A rating agency in the digital lending market must score millions of individual loans based on a unified methodology that can be applied to the entire ecosystem in real time. Quite frankly, it may seem unnecessary given that most platforms already have tested and trustworthy credit risk assessment processes in place. However, for the sake of scalability and institutionalization, it will be necessary. And it must come from an independent party.

It’s number crunching at scale. It requires massive amounts of qualifiable data. But the beauty of this new lending era lies in being digital. Which means, the underlying processes are automatable, and which means the ecosystem is highly scalable.

Introducing Loansweeper

We have developed software, that derives a standardized and platform-agnostic credit score in real-time, enabling investors to get a transparent and comparable risk assessment on investment opportunities in digital lending. From an independent third party. And all in on hand on our global B2B marketplace across numerous lending partners.  

We developed our software because digital lending will fundamentally disrupt the global credit markets. It is already happening with regards to the loan application and assessment process. However, to open this market to institutional investors, we built the necessary technology to not only digitize, but standardize the funding process in digital lending.

If you want to learn more about how we can provide you with one interface to the source, score, and ultimately fund millions of individual loans across markets, reach out to us.

Share it with your friends!

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print