Lending Marketplace Landscape: The Startups Changing Small Business Lending

By Nicholas L. Johnson

Fintech investment has seen a rapid rise in the last 5 years. Funding has roughly doubled in that time, with the median post-money valuation growing by 51%

Platform business models have been driving this growth. Platforms have long dominated some areas of financial services like payments, with companies like Mastercard, Visa and American Express in the West. And the last decade has seen the rapid growth of payment platforms like Alipay and PayTM in Asia.

However, the sector that has likely seen the strongest growth of new platform businesses in recent years is lending. Successful lending marketplaces have emerged in areas including mortgages, student loans and personal finance. But the impact has been particularly strong in the SME lending sector, which historically had a significant funding gap.

Lending has remained very fragmented, and the rise of the first wave of peer-to-peer lending platforms like Lending Club failed to change that dynamic. However, the latest wave of SME focused lending marketplaces have gained scale very quickly. Like most platform dominated industries, lending has a winner take all dynamic. The rate of change has been slowed by regulation, but there are now a handful of major lending marketplaces in each of the US, UK and Europe that have that winner-take-all potential.

Over the next few years, we will likely see 1-2 of these marketplaces dominate within each region. Similarly, we will likely see different winners within different lending verticals, such as the various segments of personal lending in addition to business finance. This dynamic is very similar to what we’ve seen with the rise of vertical-specific marketplaces in B2C retail and in B2B distribution.

As you’ll see in our SME Lending Marketplaces Landscape, there are a number of contenders in each region. Some of these have been steadily growing since the mid-to-late 2000s and have significant scale today. Others only started within the last few years but are quickly catching up with a new approach. Ultimately, you have multiple regional contenders doing hundreds of millions or more in GMV or lending volume. Which of these platforms will ultimately take hold of those top spots remain to be seen.

COVID Acceleration in Digital Lending

COVID-19 has had a dual impact on lending marketplaces. On the one hand, as credit markets have tightened, lending to small businesses has slowed substantially over the last few months.

However, a number of these marketplaces have been able to capitalize on the opportunity created by government lending programs like PPP in the US and CBILS in the UK. Lendio, for example, says it has facilitated $8 billion in PPP funding to more than 100,000 small businesses.

While this government-backed boost is likely temporary, the customer and lender relationships that these marketplaces have established during the crisis will likely endure. As lending volumes seem set to begin to bounce back in the next few months, the increased customer and lender adoption will provide a significant boost in the growth trajectory for these marketplaces.

COVID-19 has also increased participation interest from large financial institutions. With social distancing fears still prominent, traditional lenders are now quickly looking to implement technology that can enable them to go end-to-end on lending digitally. Technology partnerships with established SME lending marketplaces will help accelerate these initiatives for many traditional players.

Capturing Latent Demand

As these leading SME marketplaces compete for scale, banks could play a decisive role in which marketplaces come out ahead.

Banks have huge customer bases that will often turn to them first when shopping for loans. However, due to banks’ regulatory requirements, many loan applicants are turned away. There’s an opportunity here for banks to redirect turned down applicants to a lending platform partnered with or owned by the bank, one that is serviced by a marketplace of fintech and alternative lenders.

Expect to see plenty more activity in the years ahead – partnering with SME lending marketplaces remains a big untapped opportunity for banks.

Click here to download the full report and read an in depth analysis of the SME Lending Marketplace landscape, including a funding data, leading marketplaces broken down by region, and the profiles of notable startups.

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