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Mitigating risks in digital lending

An investor man standing on the right-side cliff tries to save his money flowing from a briefcase that is on a left-side cliff

Mitigating Risks In Digital Lending:
What Investors need to know

Digital lending has developed as an increasingly popular alternative to traditional lending methods in recent years. Investors are drawn towards the potential high returns and increase access to data, enabling them to provide capital to a wider array of borrowers.

Nevertheless, due to the rapid pace of change and innovation, investors often face an evolving landscape of risks that require effective risk mitigation strategies to match the speed of quick cross-border transactions. This article aims to explore the primary risks directly impacting digital lending and offer effective risk management solutions for investors.

An investor man standing on the right-side cliff tries to save his money flowing from a briefcase that is on a left-side cliff

Risks in digital lending

Anti-money laundering and countering terrorist financing

Anti-money laundering (AML) and countering terrorist financing (CTF) are important regulatory requirements that apply to all financial service providers, including digital lenders. AML policies are intended to stop using financial services for money laundering, while CTF measures aim to restrict the financing of terrorist activities.

Due to the large volume of online transactions and innovative technology like blockchain and cryptocurrencies, digital lending can be particularly vulnerable to AML/CTF risks. These innovative technologies may be misused by criminals and terrorists to conceal their identities and the source of their finances.

To mitigate these risks, investors should allocate their funds to digital lending companies with solid AML/CTF compliance programs. These programs usually entail conducting additional due diligence on borrowers, constantly watching out for suspicious transactional activity, and reporting it to the appropriate regulatory authorities. To share information and prevent illegal activities, digital lenders may also need to work with other financial services providers and law enforcement organizations. Failing to abide by AML/CTF standards may incur serious legal and financial penalties and reputation damage that may jeopardize the digital lending business’ future.

Consumer and merchant risk

In digital lending, the terms “consumer risk” and “merchant risk” signify the likelihood that a borrower (either a consumer or SME) would fail to make payments on time or will default on the loan, causing the lender to suffer a monetary loss.

Digital lending platforms rely on algorithms and data analytics to evaluate the creditworthiness of the borrowers by using alternative data sources (like social media activity or online purchasing behavior) apart from traditional credit history. This approach expands access to credit for borrowers who lack long credit histories, but it also elevates the risk of lending to individuals or companies that are not able to pay back the loan. Moreover, given the ease with which digital footprints can be fabricated, lending institutions must exercise caution to avoid being deceived by false data.

Given the risk inherent in the digital lending landscape, investors may suffer significant financial losses, by failing to receive loan repayments if a platform does not properly manage its capital. To avoid such scenarios, investors should consider digital lending companies with robust risk-management procedures incorporating advanced underwriting models that reliably assess creditworthiness, continuous borrower performance monitoring, and adequate provision of capital to absorb losses. Further, regulatory control and transparency in lending procedures can assist in guaranteeing that borrowers are not the targets of unfair or predatory lending practices that could put them at risk.

Cybersecurity risk

The risk of cybersecurity threats, such as fraudulent transactions, extortion, denial of service attacks, and credit card fraud, has increased in the FinTech sector due to the popularity of electronic wallet solutions. Such cyberattacks have the potential to seriously damage crucial economic infrastructures and jeopardize the stability of the whole financial sector by compromising sensitive information, purposefully harming the hardware, and disrupting services.

To minimize the cybersecurity risks in digital lending, it is crucial to remain vigilant of technology defects. This includes identifying potential security vulnerabilities in hardware, software, or network infrastructure.

Digital lending businesses should conduct regular risk assessments and penetration tests to spot any security weaknesses and address them properly. In addition, it is important to implement robust security protocols like encryption, multi-factor authentication, access controls and regular security updates. Training employees on cybersecurity risks through awareness programs is also necessary.

Fraud risk

Fraud risk in digital lending refers to the possibility of cyber criminals engaging in fraudulent activities like false documentation, identity theft, or loan stacking, for obtaining funding from digital lending firms. The usage of the internet has made it simpler for fraudsters to conduct their activities as they can impersonate other parties or create unreal identities more easily. If these fraudulent actions go unnoticed, digital lending companies may suffer considerable financial losses or reputational harm.

To reduce the risk of fraud, investors should finance digital lending companies that have robust fraud prevention measures in place, including stringent identity verification and authentication procedures, advanced fraud detection tools, and effective transaction monitoring systems.

Additionally, investors should also consider companies that maintain strict control over their internal systems and conduct regular risk assessments to identify and address any potential fraud concerns. Collaboration with regulatory bodies and law enforcement organizations is likewise important for exchanging information and coordinating initiatives to prevent fraud.

Market risk

Digital lending and the financial system are exposed to market risk because of their sensitivity to news and industry updates. This risk can be particularly observed whenever the market experiences sharp increases in interest rates or unanticipated economic shocks that cause extreme market reactions. Such situations might lead to serious solvency and liquidity problems, as observed in the case of the failure of Silicon Valley Bank earlier this year.

Market fluctuations can create excessive volatility, contagion, and pro-cyclicality, that may disrupt financial services. In these situations, customer support teams should produce ad-hoc solutions since contingency planning might no longer be able to provide adequate reaction.

Investors can mitigate the impact of unforeseen market events by investing in digital lending companies that implement robust risk management measures such as stress-testing models and contingency plans.

Additionally, it is crucial to ensure that these companies maintain sufficient levels of capital and liquidity to meet expected cashflow requirements and manage potential losses effectively. By following these guidelines, investors can minimize the risks associated with market volatility and make more informed investment decisions. To get more insights, read this article comparing traditional assets and digital lending.

Operational risk

Digital lending companies encounter operational risk in various cases such as when their established procedures and operational norms cannot keep up with the pace of work, unpredictable market conditions, and sudden unexpected changes.

Unlike traditional financial institutions that have time in their favor, digital lending companies operate at an incredibly fast pace. They are more exposed to real-time operations management, where 99% of the most crucial errors happen. The reliance on technology and automated processes increases the chances of facing operational failures from system malfunctions or cyber-attacks as well.

To mitigate operational risk, it is recommended that investors consider digital lending companies that have robust operational risk management procedures in place. These measures should include maintaining a strong control environment, providing regular training to staff, and implementing effective oversight and compliance monitoring.

Additionally, it is important for digital lending firms to adhere to regulatory requirements to minimize the risk of operational failures. By partnering with companies that prioritize operational risk management, investors can minimize the potential impact of operational issues on their investments.

Regulatory risk

Regarding laws and compliance, the whole FinTech industry places a strong emphasis on risk. Authorities must ensure that FinTech companies accurately assess risk and put risk-reduction measures in place.

However, regulative scope in many nations lags the pace of technological advancement. This suggests that for digital lending companies, regulatory norms are changing quickly, making it difficult to standardize compliance methods. While some FinTech sectors are not as strictly regulated as conventional financial institutions, regulations like PSD2 and GDPR set standards for data protection and system security processes, which have an impact on the entire European FinTech industry. Digital lending companies are frequently subject to additional regulations imposed by national agencies, such as the CFTC and SEC in the United States, FCA in the UK, BaFin in Germany, and ACPR & AMF in France.

If these requirements are not carefully followed, businesses run the risk of being found in noncompliance, suffering penalties, and losing their reputation in the market. To avoid this, investors and digital lending companies should stay informed about regulatory changes and understand how these changes might impact their business. They can do so by participating in different industry events and by monitoring relevant published papers or news. Creating and maintaining strong relationships with regulators by seeking their guidance is also important. FinTech companies should also execute regular audits to guarantee compliance with regulations and detect spaces for improvement. for improvement.

What investors need to know

As an investor, you can take several measures to mitigate the risks that come with investing in digital lending institutions. To start with, before investing your capital in a company, you should make sure you have properly understood the business model of the company, its financial performance, market position, its cybersecurity measures, and regulatory compliance. Without doing due diligence, investors will be more prone to facing the above-mentioned risks in the future.

Diversification of the portfolio is another fundamental principle in any investment strategy, that leads to lower risk exposure and optimized returns. By distributing your capital to multiple companies with varying risk profiles, within the digital lending sector, you can reduce your exposure to any specific company or market segment. In this way, you can protect yourself from experiencing significant losses from adverse market circumstances.

It is critical to take a proactive approach to investment management and to monitor your investment portfolio regularly. Particularly in the dynamic FinTech industry, in which economic trends and events can affect the performance of individual companies and the broader financial environment. By being updated with the latest news, you will make more informed future decisions. To gain important insights into your investment portfolio’s potential, you will want to track the performance of the firms in which you decided to invest by calculating key financial performance metrics and indicators.

Last but not the least, if you are looking to invest in digital lending companies that you believe have the premises to transform the industry in the future, you will need to seek professional advice provided by third parties that are not directly affiliated with them. They can help you to create a better understanding of the company’s business model, growth prospects, and competitive landscape.

By leveraging the expertise of these professionals, you can gain a better understanding of the company’s financial performance, market trends, and regulatory challenges. Having access to this information empowers you to make better-informed choices concerning your investment portfolios. Apart from that, seeking advice from independent professionals can offer an unbiased perspective of the potential risks and returns of a specific investment. By adopting this approach, you can avoid any conflict of interest that can emerge while seeking counsel from individuals that are directly affiliated with the digital lending platforms that you want to invest in.

Additional readings:

Bank, W. (2021). Consumer Risks in Fintech – New Manifestations of Consumer Risks and Emerging Regulatory Approaches. Open Knowledge Repository. https://openknowledge.worldbank.org/handle/10986/35699?show=full

 

Digital lending: Regulatory trends. Retail Banker International. (2022, March). https://www.retailbankerinternational.com/comment/digital-lending-regulatory-trends/

Pascual, A. G., & Natalucci, F. (2022, April 13). Fast-moving fintech poses challenge for Regulators – IMF. https://www.imf.org/en/Blogs/Articles/2022/04/13/blog041322-sm2022-gfsr-ch3

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.

 

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

We look forward to working with you!

Get in touch!

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How can FinTech lending help SMEs access funding efficiently?

A picture showing two SME borrowers using FinTech lending platform to obtain funding. The man is standing while the woman is sitting with her phone.

Review and reflection:
How can FinTech lending help SMEs access funding efficiently?

A picture showing two SME borrowers using FinTech lending platform to obtain funding. The man is standing while the woman is sitting with her phone.

Small and medium-sized enterprises (SMEs) play a vital role in driving job creation and innovation, making them a critical component of a thriving economy. Nevertheless, these entities frequently encounter challenges in obtaining funding from traditional lenders due to demanding requirements such as collateral, extensive documentation, and lengthy approval processes. Consequently, a funding gap for SMEs has emerged, posing a significant obstacle to their growth and development. The Bank of England (2019) has reported that approximately 25% of small businesses seeking loans from banks are denied, resulting in a significant financing gap of £22 billion for UK SMEs. 

The global emergence of FinTech companies has brought about a notable positive transformation in the finance industry in the past decade. These companies use cutting-edge technology to offer tailored financial products and services that meet clients’ diverse needs. They have embodied a new range of products made specifically for the needs of SMEs. For instance, P2P (peer-to-peer) lending, invoice financing, online supply chain financing, online trade financing, and e-commerce financing. 

These alternative funding sources are particularly beneficial for Startups and businesses with limited credit history or collateral, who may not meet the eligibility criteria for traditional bank loans. Additionally, banks, as traditional lending institutions, are susceptible to different macroeconomic events, as evidenced by the recent collapse of Silicon Valley Bank (SVB), which marked the largest bank failure since the Global Financial Crisis. With assets exceeding $200 billion, SVB was a leading institution in the venture capital industry, primarily focused on Tech Startups. Its collapse has had adverse implications for SMEs that had secured funding through SVB, exposing them to external shocks and potentially jeopardizing their operations. 

According to a paper published by ECB (2022), SMEs are more likely to turn to FinTech lending when they have relationships with banks that possess less stable funding sources, lower asset liquidity, and lower capital ratios. This suggests that one of the reasons for the shift towards FinTech is to mitigate exposure to banks that may not have the capacity to absorb shocks and are more prone to reducing lending activities during liquidity crises. These findings highlight the importance of the quality and resilience of banks in the decision to utilize FinTech lending platforms.  

By obtaining loans from FinTech companies, SMEs can diversify their lending relationships and reduce their dependence on a single bank, thereby enhancing their financial stability. The findings indicate that the SMEs seeking access to FinTech platforms are motivated to decrease their vulnerability to potential shocks to the banking system. Such shocks can restrict their access to financing, consequently impeding their growth prospects. Notably, the lending sector has experienced significant changes due to FinTech innovations, particularly for SMEs (Feyen et al., 2021).  

Five main influences of FinTech lending on SMEs

Increased Access to Financing

According to a report by the World Bank, approximately 70% of SMEs in developing economies lack access to credit. FinTech lending has helped bridge this financing gap by providing SMEs with access to credit that was previously unavailable to them. These credit lending platforms use alternative data sources and advanced analytics to evaluate creditworthiness. This way, they make it easier for SMEs to access the funds they need in a way that traditional lenders would have deemed too risky. Based on a study made by Nesta (2013), 33% of SME borrowers using marketplace lending platforms believed they would not have been able to obtain funding from other sources.  

Decreased Borrowing Expenses

FinTech lenders have disrupted the lending market by offering reduced interest rates and fees in comparison to traditional lending institutions. They do so by applying Data Analytics and Artificial Intelligence to evaluate credit risks and determine loan eligibility, which can reduce borrowing costs for SMEs in several ways. Firstly, data-driven decisions can help lenders make more accurate credit assessments of SMEs, considering data points such as cash flows, payment history, and credit scores. This is made to ensure that only creditworthy SMEs receive loans, thus reducing the risk of default. Secondly, lenders can provide more personalized lending solutions by analyzing data on SMEs’ specific needs and characteristics. This assists SMEs in achieving their objectives without getting excessive debt, reducing again the likelihood of default. Through the usage of Data Analytics, lenders can develop early warning systems to detect potential signs of financial distress among SMEs, allowing them to take proactive measures to help SMEs avoid default. Also, by using Data Analytics and Artificial Intelligence, the lending process is more automated, from credit assessment to loan disbursal. This reduces the time and resources required to process loans, resulting in lower borrowing expenses for SMEs. 

Efficiency and Effectiveness

Traditional lending processes can be time-consuming, with borrowers having to wait for weeks or even months to receive a loan. FinTech lenders have streamlined the lending process, making it faster and more efficient. According to a study by Harvard Business Review (2020), FinTech lenders can process loan applications in as little as 24 hours. This speed is particularly beneficial for SMEs that require financing urgently to take advantage of business opportunities or address cash flow challenges.  

Increased Competition

The rise of FinTech lending has not only made it easier for SMEs to obtain the financing they need to grow and expand their businesses, but it has also increased competition among lenders. Traditional lenders have been forced to adapt to these changing conditions and innovate their own lending products to remain competitive in the market, thus offering a wider range of opportunities and better conditions for SMEs seeking financing. 

Improved Customer Experience

Another benefit SMEs have from FinTech lending is the improved customer experience. Most FinTech lending allows SME borrowers to apply for a loan online. With a user-friendly interface offered by those digital lending platforms, SME borrowers can track their applications more easily, and the entire process is relatively transparent. It is safe to say that digital lending helps SMEs save time and energy to focus on their businesses.  

Statistical Data

According to a report published by Allied Market Research (2021), the worldwide market for FinTech lending had a value of $449.89 billion in 2020 and is projected to increase by 27.4% (CAGR) from 2021 to 2030 to reach $4,957.16 billion. In the past year, 22% of European startups in the financial and technology sectors increased a sum of $22.2 billion, making FinTech the most well-funded industry in 2022 (Pun, 2023). As the FinTech lending industry continues to grow and evolve, SMEs can expect to benefit from even more innovative products and services that help them achieve their business goals.

A survey conducted by EY in 2022 showed that a significant percentage of SMEs are interested in accessing financing quicker. Specifically, 66% of SMEs expressed interest in faster access to funding, with 55% wanting to secure financing within one week and 31% seeking to do so within three days. While banks remain the preferred source of funding for the majority of SMEs (63%), the popularity of FinTech lending institutions has grown considerably (56%) since the onset of the COVID-19 pandemic. In light of these developments, SMEs are increasingly seeking digitally driven, simplified, and faster funding solutions. Consequently, if banks are unable to provide these services, more and more SMEs will turn to FinTech lending companies.

Concluding Remarks

In the future, it is likely that FinTech lending will continue to play an increasingly important role in providing financing solutions for SMEs, as FinTech lenders continue to refine their offerings and cater to the needs of this growing market. This could consist of solutions such as revenue-based financing, which enables SMEs to repay loans based on a percentage of their expected future revenues, or invoice factoring, which allows companies to receive an advance on their upcoming invoices. 

Finally, as the global economy becomes increasingly digital, FinTech lending may end up becoming the main source of funding for SMEs across many nations. By utilizing the most recent technological developments, digital lenders can reach a broader range of customers than traditional lenders, especially those in emerging markets with limited credit histories. This could help drive economic growth and create new opportunities for entrepreneurs and businesspeople worldwide. 

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.

 

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

We look forward to working with you!

Get in touch!

Share it with your friends!

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Investing in Digital Lending Market 2023

Cover image for Exaloan blog investing in digital lending online loan alternative lending market 2023

Investing in the Digital Lending Market 2023

Cover image for Exaloan blog investing in digital lending online loan alternative lending market 2023

Img1. Investing in Digital Lending Market 2023 – Exaloan AG

Jump to:
  1. What is digital lending?
  2. 2023 FinTech Trend
  3. Is it a good idea to invest in the digital lending market in 2023?

What is digital lending?

Digital lending/peer-to-peer (P2P) lending/online lending is a remote and automated process of borrowing and lending money via online platforms. These platforms connect borrowers and lenders directly, bypassing traditional financial intermediaries like banks.

The prevalence of digital lending

The popularity of digital lending has been growing over the last decade, with the rise of FinTech and digital transformation in the financial services industry.

In the early 2010s, a number of online P2P lending platforms emerged, offering individual investors the opportunity to lend money directly to borrowers. Since the convenience for both lender and borrower, the push from the global financial crisis, and the good returns to investors, there were more and more digital lending platforms showing up in the market.

In the following years, traditional financial institutions, such as banks and credit unions, began to embrace digital lending, and the industry continued to grow and evolve. According to EY Global Banking Outlook 2022, many SMEs turn to using digital lending services for a simpler and faster lending process and better customer experience. Traditional financial institutions have realized that digital lending is an opportunity not to be missed for competitive differentiation.

Today, digital lending is a well-established and rapidly growing sector of the FinTech industry, with a wide range of products and services available to borrowers, lenders, and investors.

Compared with traditional lending, digital lending has the following advantages:

  • Convenience:

    Digital lending platforms are typically more convenient than traditional lending institutions. It allows borrowers to apply for loans and manage their accounts online or through a mobile app. Borrowers don’t have to repeatedly visit a brick-and-mortar location during the lending process.

  • Speed and cost-efficiency:

    Digital lending platforms often offer faster loan approval times than traditional lending institutions, which usually will take weeks or even months to process a loan application.

    Meanwhile, it also helps lenders save money by reducing overhead costs. Traditional loan processing requires much human labor to handle the paperwork and other tasks, and lenders must pay those costs. Lenders only need to hire limited staff to manage the entire process of online lending.

  • Increased accessibility and a larger potential market:

    Online lending allows lenders to reach customers who might not otherwise consider them as potential borrowers, including people with bad credit, those living outside major metropolitan areas, and even people who are self-employed.

  • Transparency and easy to be analyzed:

    For borrowers, digital lending platforms generally provide more transparency in terms of fees, interest rates, and loan terms, which can help borrowers make informed decisions about their financing options.

    From the investors’ perspective, online lending simplifies loan disbursement and creates a repository of application, underwriting, and funding data. When the power of analytics is added to the mix, investors will get considerably more efficient risk management and better portfolio performance.

The digital lending industry is a global market. Digital lending service is available in many countries around the world.

 

As of 2022, the top 5 most significant markets for digital lending are the US, China, the UK, India, and Europe. Large and mature financial services, a supportive regulatory environment, and a high level of technology adoption are necessary conditions for allowing digital lending to emerge and grow within a market.

Digital lending in 2023 and other sectors in the FinTech industry

With the surging tides of central bank stimulus, globalization, and pandemic-related phenomena that had maintained widespread expansion across the FinTech sector, it is facing a variety of particular difficulties. As 2023 approaches, topics relating with money, compliance, regulatory requirements, and managing the rapidly evolving digital environment will be very important. In this article, we will talk about FinTech trends for 2023:

  • Digital lending will continue to grow:

    Digital loans have been greatly influenced by FinTech startups. By leveraging on consumers’ desire for a frictionless experience while obtaining instant funds, FinTechs will emerge as a strong pillar for supporting SMEs.

    Lenders in the FinTech sector will be crucial in repairing the economy. A new path in the financial industry is anticipated to be made possible by digital lending.

  • Mobile payments will become ubiquitous:

    By 2023, mobile payment options will be available at majority point of sale. From vending machines to gas stations, retailers will accept cashless transactions as standard practice.

    Even though there is still much to be developed, the path is evident. The future of payments, payment processing, and payment gateways will be represented by mobile payment technologies.

  • Blockchain will continue to grow:

    While there’s no doubt that blockchain has been hyped as the future of finance, it’s also true that its potential is being slowly realized now. From the rise of bitcoin to the emergence of new applications such as smart contracts, blockchain will continue to grow for becoming an integral part of our lives.

Is it a good idea to invest in the digital lending market in 2023?

Yes, investing in digital lending is a good idea. And here are the reasons:

The digital lending market is expected to continue (rapidly) growing in the future, driven by factors such as the increasing use of mobile devices, advancements in artificial intelligence and big data, and a growing demand for alternative lending options. According to Statista’s forecast, the digital lending market size will reach 401.7 billion US $ by 2025.

Moreover, recession will BOOST the development of digital lending.

 

In times of recession, traditional lending sources such as banks may become more cautious about lending, making it harder for borrowers (especially SMEs) to secure loans. This could lead to increased demand for alternative lending options, such as digital lending platforms.

 

During a recession, digital lending platforms may also see an increase in borrowers who have been negatively impacted by the economic downturn, such as small business owners struggling to stay afloat. As a result, these platforms may have more opportunities to originate loans to borrowers who may not qualify for loans from traditional financial institutions.

 

Additionally, in a recession, traditional financial institutions may tighten their lending standards and may not be able to lend to certain borrowers who would have been approved before. This situation forces borrowers to find alternative lending sources.

 

However, we need to point out that the recession can also have a negative impact on the digital lending market, such as an increase in defaults and delinquencies among borrowers. This can lead to a loss of confidence among investors and lenders, which could lead to a decrease in loan origination and higher borrowing costs. To stop the rot, investors should be cautious and evaluate the investment in many different ways, such as credit risk, lending platform risk, regulation, the liquidity of the investment, and keep monitoring the performance of lending platform(s).

 

Overall, the digital lending market is poised for significant growth in 2023, and investors have many opportunities to profit from this trend. However, as with any investment, it’s important to research and invest wisely.

Additional Reading:

 

Digital Lending and FinTechs are Changing: The Impact on SME Lending

 

Rise of Digital Lending

 

Does Digital Lending Add Value to an Investor’s Asset Mix?

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.

 

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

We look forward to working with you!

Get in touch!

Share it with your friends!

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Digital Lending and FinTechs are Changing: The Impact on SME Lending

Cover image for Exaloan blog Fintech startups impact on digital lending for SMEs

Digital Lending and FinTechs are Changing:
The SME Finance Scenario

Cover image for Exaloan blog Fintech startups impact on digital lending for SMEs

Img1. Digital Lending and FinTechs are Changing – Exaloan AG

Recent technological advancements have completely changed the financial services value chain. Furthermore, the utilization of behavioural and psychometric information, as well as social media traces, has enabled various non-banking financial institutions (NBFCs) to bridge the funding gap, which still exists and FinTechs have started tackling it for the Micro, Small, and Medium Enterprises across the globe. FinTech has provided a hassle-free path to flexible and customized credit products by targeting niches in the SME lending sector. 

Use of Digital Payments (after Covid) 

Banks have never been more diverse in terms of the products and services they provide to their clients. However, Banks must not lose sight of the fact that lending is critical to their profitability and relevance, as well as a foundation for attracting and initiating deeper connections with clients. Lending can then serve as a launching pad for a bank to offer a broader ecosystem of financial and non-financial services including networking/access to markets and recognition, information and educating the customers. 

 

Opportunities for Banking sector in SME lending scenario 

Banks may seize new opportunities with SMEs and gain a larger share of the projected growth by reinventing and modernizing their business-lending procedures. Banks, on the other hand, face issues in the SME lending market since many continue to utilize outdated business models, rely on legacy systems, and regard SMEs as corporate entities.  

According to McKinsey, reimagining SME lending can have a major influence on bank operational performance, including:

  1. Increased conversion rates result in a 10% to 15% increase in revenue.
  2. Gains in operational efficiency of 20 to 30 percent as a result of digitizing the customer journey and reducing touch-time.
  3. Reduced the risk of nonperforming loans (NPLs) by 10% to 25% by improving risk models and employing analytics to make automated choices.

The SME sector, which contributes significantly to GDP, exports, and jobs, continues to play an important role in driving growth. However, despite their demonstrated growth record and contribution to the economy, financial institutions have underserved SMEs. This circumstance occurs for a variety of reasons. Financial institutions consider the category as high risk due to its heterogeneity. The majority of enterprises are family-owned, and promoters prefer funding from unorganized sources at exorbitant rates. Inadequate credit history inhibits banks’ capacity to assess such units’ credibility. Banks face challenges due to poor record keeping and financial planning. 

 

Fintech's Changing Face 

Fintech is no longer only a disruptor; it is assisting SMEs in becoming more bankable by alleviating critical pain points such as quick access to credit. It is making inroads into the financial services business as an innovator and enabler, with the financial muscle to bear the risk of loans and recoveries. Fintech lenders, having a technology advantage and free of legacy baggage, are acquiring a competitive advantage over traditional banks. The statistics are telling: 

To quote PwC: 

  1. 67% of traditional financial institutions are already feeling the heat
  2. 84% of traditional financial institutions are embracing disruption
  3. 95% of traditional financial institutions are expected to increase fintech partnerships in the next 3 to 5 years
An image shows the global fintech scenario and how Fintech startups impact on digital lending for SMEs

Img2. Global FinTech Scenario (Source: Fintech Magazine, 2021; World Bank, 2022; Statista, 2021; Businesswire, 2021)

Final words: 

Digital lending and fintech are transforming the SME finance landscape. Banks are trying to adopt the digital environment and automating backend activities to reap both short- and long-term benefits but still there is a long way to go. End-to-end digitization will not only help banks reduce decision turnaround times but will also reduce the processing costs associated with lending to these borrowers. This will not only give prompt access to funds but will also reduce the cost of these loans. Financial institutions are experimenting with robotics, blockchain, artificial intelligence, big data, and analytics. New-age fintechs like Exaloan AG has potential to revolutionize the SME finance landscape. With its innovation and new-age products such as Loansweeper, which provides access to millions of investable loans operated by verified lending platforms.It brings transparency and standardization across the industry and assist in real-time decisions making, thus also enabling institutional investors reaching out to the underserved SME clients. These technologies enable banks to transition from traditional collateral-based funding methods to enhanced cash-flow lending. Some reputable FinTechs offer services such as converting scanned financial bank statements into customized formats for quick decision-making and offering borrowers digital platforms for easy access to funding. Banks and fintech will need to collaborate to provide customized digital products while also guaranteeing that the majority of SMEs can benefit from traditional lending channels. 

References:

Statista (2021). Digital Payments report 2021. https://www.statista.com/study/41122/fintech-report-digital-payments/ 

 

Cag. (2021). 17 Fintech Trends You Should Know About https://fintechmagazine.com/sustainability/17-fintech-trends-you-should-know-about-ultimate-guide 

 

World Bank (2022). COVID-19 Drives Global Surge in use of Digital Payments https://www.worldbank.org/en/news/press-release/2022/06/29/covid-19-drives-global-surge-in-use-of-digital-payments 

 

Zai (2022). The outlook for the global financial technology (fintech) industry https://blog.hellozai.com/the-outlook-for-the-global-financial-technology-fintech-industry 

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.

 

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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.

 

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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.

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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.

 

 

 

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Credit platforms and their key role in the context of global funding bottlenecks

Woman holding a mobile phone with loan application approval. She is being prompted to press a button to release the funds. Close up.

Back in October, Exaloan became a member of the Association of German Lending Platforms, representing digital debt financing in this association. Earlier this month, we featured an article on their quarterly briefing where our CEO and co-founder, Luca Frignani together with our Business Developer for SouthEast Asia, Katharina Lentge, talked about the role of credit platforms in closing the Global Financing Gap.

Credit platforms and their key role in the context of global funding bottlenecks

 

Even before the pandemic, access to finance was considered one of the biggest growth hurdles for companies, especially in developing countries. Around half of all companies worldwide have no access to credit products. As a result, every year there is a shortfall of around $ 5.2 trillion in funding that investors could raise. In the coming months, this problem will increase further due to the difficult physical access to financial institutions and recessive tendencies. Financial inclusion as a development goal includes the responsibility to make affordable financial services available to the players in our economy according to their needs. Innovation in the form of digital marketplaces represents an opportunity to fulfil this responsibility and to close the structural gaps in our financial systems. By digitizing the credit process, credit platforms are significantly simplifying access to capital for borrowers and opening up new markets for investors. The allocation of financial resources can also be managed effectively through data-driven risk assessment and sensibly through the promotion of certain market segments…

To read the full article, please visit the Verband deutscher Kreditplattformen‘s website.

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Does Digital Lending Add Value to an Investor’s Asset Mix?

Does digital lending add value to an investor’s asset mix?

Digital lending is a hot topic. And as we commented in our last post, even a global pandemic has not mitigated the segment’s momentum. Quite the opposite in fact. However, further growth will only be sustained if institutional investors start entering the stage to fuel the supply side with bigger cheque sizes – and if some key questions about digital loan performance are addressed.

In this post, we take a closer look at why digital lending and private debt receive so much attention and whether it might be a good idea for institutional investors to have a closer look at this space (Spoiler alert: yes, it is).


In a nutshell, we modeled the investment opportunity set of traditional asset classes available to a European institutional investor and compared the results with an enhanced set that includes digital lending.


Market Data and A Lot of Number Crunching 

For our benchmark opportunity set, we created 1 million different portfolio allocations with the monthly return series of indices representing the following asset classes: equity, real estate, corporate bonds, sovereign bonds, and private equity (1). To take a more meaningful perspective across the last decade, we considered the historical return observations from January 2011 until June 2020.

Since the digital lending market is still relatively young and not standardized, a benchmark index with a long data history is unfortunately not readily available (Spoiler alert #2: we are working on it). For now,  we turned to academic research and number crunching. Following the methodology in “The Components of Private Debt Performance” proposed by Giuzio et. al. in 2018 in the Journal of Alternative Investments, we approximated the returns in digital loans on the basis of European bank lending rates. (We will shed more light on the method behind our madness in another post).

(1) For equity, we used the MSCI Europe, an index that comprises 435 European Corporates and captures roughly 85% of the market cap of European Industrial Nations. For Real Estate we looked at the MSCI Europe Real Estate Index, a free float-adjusted market capitalization index that consists of large and mid-cap stocks in the real estate sector across 15 Developed Markets (DM). Furthermore, Euro-denominated, investment-grade corporate bonds, and sovereign bonds were proxied using the iBoxx EUR Non-Financial and iBoxx EUR Eurozone bond indices. Private Equity is represented by the STOXX Europe Private Equity 20 Index, which is designed to measure the performance of the 20 largest private equity companies in Europe.

Visualizing Our Results: Digital Lending Is an Interesting Piece in the Asset Allocation Puzzle

To build the opportunity sets, we created all allocations using no-leverage assumptions & no-short-selling constraints. We also constructed the respective efficient frontiers and color-coded the Sharpe Ratio of each individual portfolio for better comparability. The results we get when constructing portfolios with varying allocations using the traditional asset classes are displayed on the left in Figure 1. On the right-hand side, digital loans are added to the mix.

Figure 1: Results with traditional assets vs. Results when adding Digital Loans

The color scale on the far right indicates the value of the Sharpe Ratios (red = high, blue = low). The results show that adding digital loans to a traditional asset mix can significantly improve the investment opportunity set as evidenced by the higher Sharpe ratios of portfolios that can be constructed. For simplicity, the risk-free rate is set to 0 in all our calculations. The results indicate that adding digital loans can help diversify an investor’s traditional asset mix,  and improve investment performance. Part of the result can be explained by the low correlation of digital lending to traditional asset classes.

For a better display, we also contrast the different opportunity sets without the noise from the individual portfolios. You can see our calculated efficient frontier in Figure 2. The direct comparison shows that the efficient frontier including digital loans clearly dominates the attainable results without digital lending.

Figure 2: Efficient frontier of Traditional Asset Mix vs. Adding Digital Loans

Our findings show that adding digital loans to a portfolio could be an interesting new way for investors looking to diversify their portfolio holdings, particularly given the backdrop of a low yield environment.

 

Exaloan is working on standardizing and automating digital loan investments for institutional clients across the globe. We are convinced that digital lending is a highly interesting and impactful emerging new asset class and with studies like these we hope to invite more interested parties to our dialogue.

Leave a comment or a question, we appreciate the input.

 

As mentioned, we will dive deeper into the return construction for digital loans in one of our next posts. Follow us to stay up to date. 

If you would like to read the full research paper, or find out more about how we enable institutional investors to tap into the digital lending market, click the button on the right!

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