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March 13, 2015

Online Payment Companies Hone In On Financial Lending

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 5:53 AM

SMEs turn to peer-to-peer lending [Source: https://www.youtube.com/watch?v=C_c9Hs3wGv4]

It was the legendary technologist Andy Grove who said: "Only the paranoid survive." Smart advice from a smart businessman. Today's marketplace is shifting and changing so rapidly that it certainly does pay to keep one's eyes on the prize.

Consider, for instance, the online payments space. The post-global economic crisis created a new world order, especially when it came to financial services firms. During the World Economic Forum (WEF), the best and brightest from the banking world discussed how nimble even the largest banks have had to become just to survive. And how, by the power of crowdfunding, new entities are giving them a run for their money.

Crowdfunding (or crowdsourcing, as some people call it) is a simple concept. It relies on the sheer number of connected consumers around the world to engage in a cause or new venture. Whereas in the past, an entrepreneur might have had to grovel before countless venture capitalists to receive the necessary funding to get their business off the ground, now they can theoretically present their ideas to a global online audience. Let's assume that nobody in this online audience has even one-tenth the financial resources of one venture capital firm. But perhaps 100 people online respond favorably to the business idea. That's enough to get the entrepreneur off to a great start! And the numbers aren't too bad either.According to CB Insights, globally, 193 payments start-ups received venture capital funding in 2013, and there were 40 new mobile money services launched in the same year.

This scenario is what is essentially playing out in the financial services arena right now. The Infosys-EFMA joint research report notes that the non-cash payments industry is growing between 11.6% to 16.8% annually in emerging and growth economies. There are online payment companies that are fairly well known and established - firms like PayPal and Square. Recently, executives in those companies have been leveraging the power of Big Data and analytics and come to the conclusion that what has made them successful in the realm of online payments can also make them just as effective with loans. In fact in just five years, Lending Club (an American peer-to-peer lending company), has grown from USD 52M in 2009 to USD 2B in 2013, primarily driven by the channel innovation.

What I find ingenious is that these online payment companies have also ceded the large business loan space to the banks that have dominated that business for centuries. What they're going after is the small to medium-sized business loan. You see, after the global economic crisis, governments put tighter regulations around banks that included the amount and kinds of loans they could provide. Small and medium-sized businesses bore the brunt of these regulations. A kind of vacuum that was created by those regulatory measures has been efficiently filled by online payment companies.

I highly doubt that the world's global financial services firms are worried about this new development. They have plenty of large customers who are constantly borrowing huge sums of money. But like the concept of crowdsourcing itself, all those small loans facilitated by online payment companies can add up over time. And in the world of banking, reputations and brand names matter a lot. So it could stand to reason that after a sterling track record of making smaller loans, larger entities might be persuaded to try out the loan services of online payment systems.

Indeed, discussions at past WEFs in Davos demonstrated that the world's largest banks have become more nimble in a post-crisis world. But so have their online competitors. It will be interesting to see how this financial services space plays out in the next few years.


good one

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