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Nicholas Kitonyi
Nicholas Kitonyi
Articles (391)  | Author's Website |

How Fintech Is Reshaping the Small Loan Market

LendingClub and peers are a disruptive force, but for how long?

September 13, 2017 | About:

The financial technology market has emerged as one of the most promising places to invest in the financial services sector. This segment of the industry has influenced changes in the insurance sector, the stock market, the payments market as well as the credit market. Startups and existing small businesses have capitalized on the revolution of the financial services sector to launch their businesses online as well as gain access to competitive lines of credit.

Fintech companies around the world have moved swiftly to fill the gap left by mainstream lending institutions due to constraints related to interest rates and profit margins. Big lenders in the market are under constant pressure to increase profit margins, which limits the size of their addressable market, especially when trying to woo small and medium-sized business borrowers. Their interest rates are often high as they seek to remain competitive in the larger spectrum of the financial services industry.

This has sparked the rise of a new marketplace, popularly dubbed “peer-to-peer lending,” where online business loan platforms allow individuals and small enterprises to borrow frow and lend to eachother. One of the largest beneficiaries is LendingClub Corp. (NYSE:LC), which has seen its revenue increase 1,278% in under five years, from just over $37 million to over $500 million as of June 30 on a trailing 12-month basis.

The company’s net income, however, has failed to match the top-line achievements as it remains unprofitable. These gains can be attributed to the developments in the fintech market, which have attracted several businesses and individuals deemed too risky by the traditional banking system.

In the peer-to-peer lending market, those providing credit to borrowers come in as investors and, based on numbers being floated on various media platforms, they can expect returns of up to 20% per year. For instance, according to a recent report published by Reuters, Brazilian-based fintech companies are paying investors about 22% returns per year while borrowers are charged interest rates from as low as 1.7% to as high as 6.3% per month based on their credit profiles.

As such, it would be correct to say the top-line success experienced by the likes of LendingClub over the last several years has triggered a flurry of activity in the peer-to-peer lending market. Currently, startup lending platforms are being launched right, left and center, which will only make it cheaper to access small business loans.

Nonetheless, the peer-to-peer lending market has demonstrated over the last several years some signs of weakness for its long-term future. Some pioneers of the industry have shown interest in applying for mainstream banking licenses, which raises questions regarding the long-term viability of the marketplace lending business model.

For instance, U.K.-based Zopa, which was among the very first peer-to-peer lending platforms launched, reportedly applied for a mainstream banking license last year. According to the Financial Times, some players in the market said peer-to-peer only works on a small scale, adding “there is not enough demand for credit to grow it enough and so they have to act like banks.”


The marketplace lending business model appears to have notable obstacles when it comes to long-term growth. Some players are already applying for traditional banking licenses to start taking customer deposits. By doing so, they can create another stream of income, which can help them become more profitable and develop a solid base for organic growth.

This probably explains why, despite having massive top-line growth over the last five years, LendingClub has yet to become a profitable business. Perhaps it will follow in the footsteps of Zopa and push for a mainstream banking license.

Disclosure: I have no positions in any stocks mentioned in this article.

About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

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