What is Crowdlending?
Gregory AutinManaging director of AUTIN&Co (AUTIN GmbH)
Any credit activity facilitated by an online electronic platform that matches loans with lender interest is variably called "crowdlending", "loan-based crowdfunding", "P2P lending" or "marketplace lending". The lenders that invest in loans via crowdlending platforms are the "crowdfunders", "loan-based crowdfunders", "peer-to-peer lenders" ("P2P lenders"), or "marketplace lenders", respectively. The term used generally depends on the jurisdiction where the platform is located.
Crowdlending comprises consumer lending, business lending and property lending in the form of a secured or unsecured debt - loan, bond or other type of debtor note. Crowdlending platforms offer online alternative funding and investment opportunities to individuals, businesses and other entities from individual and institutional investors.
A crowdlending platform acts as a marketplace that matches the funding needs of borrowers with the investment interest of investors for a fee. They either allow investors to search and find individual loans or automatically present investment opportunities for them to select from.
The traditional crowdfunding campaign follows the direct model. It allows investors to select individual undivided loans, which leads to low loan diversification and the possibility of only partial achievement of the funding objective of the borrowers.
The diffused model allows a platform to actively allocate funds from investors to different loans, providing lenders risk diversification and borrowers quick funding. Automatic order placement enables investors to set the maximum amount and distribution of their investment according to risk bands, loan maturities and other parameters for automatic execution.
Many platforms provide for the secondary market trading of their loans - in the US, the notes that P2P platforms issue are registered securities. In such cases, the term "debt-based crowdfunding" would be appropriately used.
The crowdfunding market is characterized by new technologies, such as blockchain lending and the incorporation of smart contracts - therefore, the term "fintech credit market". Regulatory measures for investor protection are also being implemented and call for adaptation.
Crowdlending Platform Models
Traditional crowdlending is transacted over three-party P2P platforms that attract the interest of lenders and borrowers, act as an intermediary between the parties, administer the transactions, and perform payment collection in return for a fee. Four-party P2P platforms involve a borrower, a lender, the platform and a third-party loan originator in the lending process, which makes loans available from outside the platform.
The client segregated model is used by three-party platforms that match lenders with borrowers with the funds and loan repayments flowing through client accounts that are kept strictly separate (segregated) from the platform's own accounts. The platforms serve solely as an intermediary between borrowers and lenders and charge the transacting parties fees for account setup, loan origination and loan administration.
The balance sheet model is used by three-party platforms that originate loans for their own account that they then sell to investors to fund the loan. The loan default risk remains with the platform until the loans are sold or otherwise transferred. The platforms obtain the funds from the investors to lend to borrowers, who repay their loans to the platform. To fund loan origination, these platforms rely on wholesale funding sources, such as debt issuance and securitization, instead of the "crowd".
The notary model is used by four-party platforms, where the platforms act only as a broker to match the loans originated by a partnering bank to the lenders. The originating banks sell or assign the loans to the investors, thereby also transferring to them the default risk. The loans may be sold either directly in smaller packages or to a platform subsidiary that repackages them into multiple loans. US online "notary" platforms use this model to issue notes that qualify as securities, making them subject to US securities regulation as an investment activity - therefore, it is also called "marketplace lending".
The crowdlending process begins with a prospective borrower applying or registering with a P2P platform for a loan. The borrower provides credit information and goes through a series of checks and assessments for the determination of the loan's risk and suitability.
If a loan fits a platform's product type and the credit risk is acceptable, the platforms price the loan. P2P platforms must collect enough ongoing fees from their loan book to fund continued servicing of the loans without requiring any other income.
The platforms generally support the investors' loan selection process and provide a credit risk assessment of the loans and projects. This usually comes in the form of credit scores sourced from third-party credit bureaus or generated by in-house grading systems.
P2P lending may be backed by real property (real estate) or personal property (chattel) or provided on an unsecured basis. General loans are unsecured and not backed by any collateral from the borrower's side.
In marketplace/P2P property lending, funding is secured by the borrower's real property. Loan securitization by marketplace lenders is backed by consumer, business and property loans. When banks originate loans for P2P lending platforms, the lenders' funds also serve as collateral for the loans.
The possibility of loss resulting from the failure of a P2P platform to perform properly or cease to operate altogether is platform risk. Other risks that P2P platforms are exposed to include fraud risk and information security risk. The risk can be mitigated by segregating customers' accounts from the platforms' assets, outsourcing loan administration to a third party, capital and professional requirements for platforms, and insurance protection guarantees.
Regulatory risk is the possibility of changes in the regulatory environment that can adversely affect the business. Regulatory uncertainty creates tension between facilitating the growth of the crowdlending industry against the need to ensure adequate investor protection.
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