First of all, I need to confess something: While CrossLend is a capital markets technology provider today, we started out as a P2P lending platform. We stopped our P2P operations a long time ago for a number of reasons, but the main reason was: complexity. While I cannot state that I lived through a whole life cycle of a lending platform, I experienced most of it, and in 10 years in the FinTech lending economy, I have seen lenders come and go, fail and succeed.
Building and entertaining lending operations as a FinTech is a super challenging thing which is often underestimated in terms of its complexity. A lot of things (like customer acquisition, the evolution of risk models, customer service, collection, and regulatory issues) have to be handled simultaneously and finding an equilibrium is tricky.
But what can really kill an otherwise successful credit platform is the funding side with regard to cost of funding, scalability, and complexity. This is where we have seen teams be arbitraged out between operational and funding costs, serving only as an origination front-end for one or a handful of funding sources.
To better understand this, we have to acknowledge that every lender basically goes through the following phases:
- Start of operations: no track-record, loans are mainly funded through equity (sometimes plus a shareholder loan).
- After around 12 to 18 months (for invoicing etc. this can happen earlier): depending on asset type, the first loan cycles have been completed. Funding of loans through larger-on balance sheet loans or first off-balance SPV structures, however with significant warrants / discount on equity.
- Either after the track-record is deemed “mature” (which depends on the asset type) or in case of secured lending once a rateable backup servicer structure is in place: lenders shift to capital market funding.
Every phase has very special challenges. In phase 1, survival is paramount. We have seen experienced founder teams in the FinTech space who have almost leapfrogged this phase and started with phase 2 at slightly higher terms.
In phase 2, the core challenge is to scale operations and lending volumes without jeopardising credit quality. But this stage is also about maintaining independence. This is the point at which investors typically show up to mention the magical 100m facility. Don’t get eaten alive here! 100m sounds magic, but it is the terms that matter. Either the platform isn’t ready for a 100m facility and therefore it is vulnerable, or it is ready to think about a scalable capital markets solution – and this doesn’t stop at 100m. We have seen lenders stranded, finding themselves fully dependent on one funder at this phase. This is either because the equity strings attached were too heavy or because they failed to deliver the necessary volumes to stay diversified with other funding partners on board.
Phase 3 is where a credit platform enters into full scalability. The first capital markets transaction is typically seen as a milestone and too much value placed on the purpose of a “securitisation”. As a result, traditional heavyweight structures have to be subsidised by the lender.
Navigating through this journey requires an agile CFO and a strong, tech-savvy capital markets team. While on the one hand, it is crucial to maintain a diversified funding source, at the same time this means interacting with multiple (>10) investors in the mix and managing expectations since large tickets multiplied by many investors will most likely overstrain the capacities of the origination team.
During this phase, it is crucial for the capital markets team to set the data and communication standards so as to not run behind the exponentially growing investor requests. Strong technology is required to streamline data-related communication, fulfilling the regulatory requirements of the investors, together with scalable and cost-efficient capital markets instruments for trade execution. This is key. If this point is overlooked, funding costs still will go down but at the same time, the operational costs associated with funding will scale up.
CrossLend DataSuite provides state-of-the-art data technology, regulatory reporting, and trade execution via digital securities that allow the CFO or Head of Capital Markets to minimise operational efforts while scaling from on-balance-sheet debt to fully rated capital markets structures. This saves time and reduces costs, allowing a fully-fledged capital markets level of communication with investors, even at a stage where this level of communication would not normally be expected. Using DataSuite gives originators more space to tackle the thousands of other challenges that need to be mastered when building a successful lending business.