Alternative Consumer Lending
Alternative Consumer Lending is part of the broader Fintech revolution and when we talk about Fintech, we tend to treat all its various components very homogeneously, although they are not. For example, a very visible piece of the puzzle is the online and mobile payment component, a market space which is attracting the interest of start-ups, financial institutions, credit cards companies as well as tech giants like Apple, Google, Alibaba. But online payments and robo-investing have really not much in common: technological and social trends differ, as well as the target customers and the route to market characteristics.
One of the Fintech components that stands out for its inclusive approach, is the alternative consumer lending: it comprises a number of players and technologies which go well beyond the traditional credit scoring mechanism, while at the same time reaching out to potential borrowers who are traditionally excluded by the current lending standards. Of course some of this companies, combine services, by offering their lending as an option of their payment processing for purchases.
Among those firms, Affirm, a San Francisco based Fintech, which provides an option to customers buying on-line to pay for their purchases in installments rather then on the spot. The company – which is the brainchild of one of the co-founders of Paypal – has raised nearly 720 million USD – in both debt and equity – since its incorporation in 2012 and even made two acquisitions.
In the Alternative Consumer Lending there is a lot of AI, machine learning and cognitive sciences. For example, British firm Aire uses a combination of artificial intelligence and cognitive sciences to disrupt the credit scoring process, which is traditionally based on the notion that past performance is a good predictor of future credit attitude. And while this is standard everywhere, lacking an history, often results in a denied access to credit. Aire, per se, is not a lender: they have developed an algorithm based on a set of questions, that validates future attitude beyond traditional credit scoring. Aire offers their products to lenders, and enables them to capture prospective customers which would be normally excluded by the traditional credit process. The firm, which was incorporated in London, one of the Fintech global hubs, raised 12 million USD from investors, and is poised for further growth.
Of course some of the players use machine learning and are integrated by offering lending directly to the prospective borrowers: this is the case of polish start-up Cream Finance, which uses machine learning algorithms on on-line data and traditional credit information, to make a decision on whether to lend or not to a consumer. The company receives nearly 30 million USD in equity financing from investors, and operates in Poland, Latvia, Czech Republic, Georgia, Denmark, Mexico and Spain.
Among the many players of the Alternative Consumer Lending, quite a few aim at creating marketplaces where lenders and borrowers can meet. This is the case of credible, a California-based market maker where consumers can match their re-loaning/ re-financing needs with prospective lenders. The company was incorporated in 2012 and collected nearly 25 million USD in funding, before IPOing in 2017 on the Australian Stock Market. Among the investors in credible, is Ron Suber, a prominent Fintech investor, and a President Emeritus at Prosper, the first peer-to-peer lending marketplace. The company was founded in 2005, and trough the years has raised nearly 400 million USD in funding, while enabling almost 10 billion dollars in lending. Peer-to-peer lending is of course one of the most interesting and innovative components of the Alternative Lending space, and one of the Fintech pioneers: for example Lending Club, explains a bit the interest of investors in the sector, as it IPOed in 2014, 8 years after seed financing, reaching an astonishing valuation of 8,5 Billion USD, during its first day of trading.
The Alternative Consumer Lending space, is a very diverse ensemble of technologies and approach: while there is a core-basis of Artificial Intelligence, with algorithms being used to either scan on-line data or reach conclusions based on ad-hoc questions, this space is also dominated by peer-to-peer lending mechanisms and marketplaces, in which traditional financial institutions and lenders are cut off completely.