Moody’s: Marketplace lending is beneficial for all, in spite of risks

Moody’s: Marketplace lending is beneficial for all, in spite of risks

- in All News, Crowdfunding

The growth of marketplace lending (MPL) is increasing steadily in the US since the crisis and is beneficial for all parties involved, including small businesses and banks, in spite the underlying risks. This is the main conclusion of a recent report of the credit ratings agency Moody’s Investor Services, entitled “Online Marketplace Lending Partnerships Can Benefit Lenders and Small Businesses; Pitfalls Remain for A Nascent Industry”

According to the document, even though the relative share of marketplace lending remains low and it still faces a number of challenges remains, the eventual partnership between marketplace lending companies and “traditional” financial institutions like banks, could fuel the growth of the sector.

“The high lending rates at small business MPLs reflect the high credit risk; however, they also reflect high sales and marketing customer acquisition expenses and high costs of funding. MPL partnerships with banks have potential to benefit lenders and small businesses, although such partnerships involve regulatory and loan performance pitfalls,” Moody’s notes.

The benefits for the small businesses would be the expediency of the MPLs technological platforms and the lower rates offered by banks. On the other hand, the banks could benefit from the faster loan application review process and expanding their client base.

MPL-bank partnerships, however, could face several challenges going forward, including model risk and loan performance uncertainty, and increasing competition from banks’ in-house lending platforms.

Another potential threat for the growth of the MPLs is the current relatively lax regulation of MPLs, compared to consumer lending. With the recent undertakings of several US States to regulate such companies, however, it seems P2P lending may be grouped with consumer lending and become subject to much tighter regulation.

At the same time, the Moody’s report pinpointed the main reasons the micro- and the small businesses turn to MPLs instead of banks. The research found that the insufficient credit history is the main obstacle the micro-businesses (those with $100K-$1 million in revenues and those with revenues below $100K) face when trying to obtain a business loan. Another significant impediment is the “insufficient collateral”.

Both problems are the main reasons that drive the micro-businesses to the MPLs, rather than to the established banks.

Established small businesses (revenues of more than $1 million), meanwhile, turn to MPLs to meet short-term liquidity needs as the approval process is much faster than that of banks, or whenever their performance is deemed too weak by banks.

Marketplace Lending is a relatively new term that encompasses all types of peer-to-peer lending and crowdfunding.

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