Online Lending Market Sectors – a Venn Diagram

Lending Times counts hundreds of active Online Lending originators. In the 1st generation all companies are trying through land grabs to cover as many markets as possible. In the 2nd generation of online lenders companies have focused on competing with the 1st generation by being fast followers and learning from the 1st generation mistakes. However the 3rd generation, also referred to Alt Lending 3.0, many companies focus on niches which bring cost-effective and defensible customer acquisition path.

There are many different potential target segments for online originators. To help organize, visualize or maybe spark some new ideas here is a simple Venn diagram of some of the different potential sectors we see often appear. We tried to include some subcategories while doing our best to keep the diagram simple and reader friendly. A complete map will probably look like a bubble bath.

Online Lending – Source of funds and risk structures- a Venn Diagram

Starting with Peer-to-Peer Lending and finishing with banks, there is a whole spectrum of sources of capital and cost of capital to explore.

1. In a pure Peer-to-Peer model originators pass 100% of the yield to investors.
2. In a depositor model, like in a bank, banks will pass to the source of capital only a fixed percentage, typically minuscule, of the yield and keep the rest.
3. In a marketplace model the originator and the sources of capital will negotiate deal-by-deal how much of the yield will be paid to the source of capital. Typically it would be less then in the p2p model and more then in the depositor model.
4. In balance sheet lending typically the sources of capital is the originator balance sheet itself and the originator keeps 100% of the yield.
5. Except Grameen Bank, very few organization explore Non Profit / Grants as sources of capital. However that is a viable source that is also very cost effective. Maybe not as scalable though.
6. And last but not least one can also tap the public or over-the-counter markets with public offerings, securitization, bonds and more to raise capital. The cost of doing so usually involves high upfront and fixed fees but a cheaper variable cost for the originator.

And of course at the end of the day who “owns” the default risk on the loans is tied to how the capital is structured and sourced.

To help visualize this space here is a simple Venn diagram of these aspects. Many companies work with more than one type of capital.

An interesting note: P2P Lending and Depositor capital do not overlap only for historic and philosophical reasons. So maybe we should ask ourselves. Why don’t they overlap exactly ? Will banks offer pure p2p products to their clients ?

Author: George Popescu