Marketplace Lending during Covid: a commentary on the possible long-term and regulatory impacts, as well as the importance of resilience
The COVID-19 crisis has led to a multitude of changes in the area of marketplace lending; not only did it provide digital lenders with an increase in popularity - but it also served as a catalyst for regulatory changes and advancements. In physics, resilience refers to the ability of an elastic material to absorb energy and release that energy as it bounces back to its original shape. In the lender market, maintaining good resilience is an important aspect in keeping up with rapidly changing market conditions and regulations.
Regulatory framework in Switzerland
A survey from the University of Luzern regarding Swiss Crowdlending[1] platforms states that regulations belong to the most pressing and therefore biggest challenges (2021, p. 16)[2]. Consequently, it is very important to always keep an eye on whether the rapidly changing market will stimulate new regulatory changes.
In Switzerland, there is no regulatory framework that specifically targets crowdlending. Therefore, the general framework regulating the financial market applies. The consequence is that every change in the general framework may potentially affect the crowdlending market. There are currently 15 digital credit marketplaces in Switzerland, each offering various types of loans that are regulated to different degrees. For investors, this consequently means that they need to keep a close eye on regulatory changes as they may affect each marketplace and the associated underlying investments to a different degree.
Impact of COVID-19
The COVID-19 crisis has had an abundance of effects on many sectors, so it comes as no surprise that the regulation of crowdlending markets is not the only development. The crisis has had a lasting effect on (marketplace) lending in general.
Especially SMEs but also bigger companies have had to withstand many tough challenges in the past year, testing their resilience to a crisis repeatedly. Nevertheless, many of them needed financial support from the government mostly through COVID-19 credits.
In the United Kingdom, lending during the Covid crisis became even more attractive for marketplace lenders. Funding Circle, a marketplace lending platform, has been the 5th largest Coronavirus Business Interruption Loan Scheme Lender (CBILS). With about 20 % of the total loan volume approved by the British government, marketplace lending gained more importance [3].
In Ireland there are also similar movements: LinkedFinance, a Fintech business lending firm, has become the first non-bank lender under the Government’s Covid-19 Credit Guarantee Scheme (CCGS) [4].
In Switzerland lending through government loans was intermediated through traditional banks and therefore not by marketplace lenders. However, COVID-19 forced banks like UBS or Credit Suisse to think more about digital lending platforms and to digitalize processes. UBS for example started its new platform “key4”, a new mortgage platform for owner-occupied homes [5].
These changes in Europe have not gone unnoticed in the EU. The European Commission has started implementing a referral scheme [6]. The idea behind this is that banks have to refer declined SMEs to alternative lenders.
The crisis forced many businesses to evaluate and rethink the ways in which they do business while embracing new technologies and lending in general. Consequently, the COVID-19 crisis has been and will be working as a catalyst for marketplace lenders in the long run [7].
Since this market is relatively new, changes and adjustments (also in the area of regulations) are still frequent. The COVID-19 crisis has shown that marketplace lenders can take the role of a traditional bank in certain areas. The poor regulation of crowdlending in certain countries has put the legislature on the move. Through the crisis, the need to regulate marketplace lending has grown and therefore been moved up on the priority list of regulators in many European countries.
To an investing company or an investor, unknown variables are associated with high risk as they reduce the aforementioned resilience of the company. Regarding the lending scene, with its many different players, regulatory frameworks, and different setups this can be considered the main hurdle for professional investors. A good strategy that helps keep track of all the changes is vital to a successful investment approach, however, it can be very difficult and time-consuming to keep track of all these variables.
These variables are each based on different rationalities, such as legal, technical, or financial. Consequently, in order to maintain a high level of resilience, experts in each of these areas are important key figures for every professional investor.
The role of i2
The need for a solution that unites the most important crowdlending marketplaces and also diversifies them if needed is urgent. The business idea of the i2 Group is simple: We make digital lending accessible for professional investors. With a highly skilled team, we focus on changes concerning regulations and also profit from first-hand information, and rely on experienced industry experts. With the scalable business model and technology solution designed to handle high-volume data, we can both unite the most important marketplace lending platforms while simultaneously diversifying them if needed. Our software also collects, standardizes, and analyses loan data on a daily basis from tens of thousands of loans.
We consult national laws and regulations and based on those pieces of information advise investment strategies. This results in a better and faster adaptation to possible changes. Consequently, that leads to an increase in the resilience of companies investing in the i2 software.
i2 can select the best marketplace lending partners for your specific needs and gives you a valuable overview of the big picture. This makes it easier to foresee trends and therefore react more precisely to the unknown variable x while constructing an investment strategy that is tailored to your very specific needs.
Interested? Get in touch with us through the form below this article.
[1]Crowdlending is often also referred to as “Marketplace Lending”, “Digital Lending” or “Peer-to-Peer-Lending”
[2] https://blog.hslu.ch/retailbanking/files/2021/07/Marketplace-Lending-Report-Switzerland_2021.pdf
[3] https://p2pmarketdata.com/p2p-lending-statistics-2020-covid-impact/
[4] https://www.crowdfundinsider.com/2021/01/171005-linked-finance-becomes-irelands-first-non-bank-lender-to-be-added-to-countrys-covid-credit-guarantee-scheme/
[5] https://www.mondaq.com/government-measures/1019786/2020-trends-and-developments-in-digital-lending-in-switzerland
[6] https://p2pmarketdata.com/p2p-lending-statistics-2020-covid-impact/
[7] https://www.mondaq.com/government-measures/1019786/2020-trends-and-developments-in-digital-lending-in-switzerland
