From Bad To Worse, Marketplace Lending And The Brexit

Brexit.

By the end of Friday, $2 trillion was gone from the world markets. By the end of yesterday, that number had bounced up another trillion dollars.

That’s trillion, with a “T.”

And while the rest of the world has been sent reeling into uncertainty, marketplace lenders have had the curious distinction of avoiding that fate.  Not because they aren’t reeling, unfortunately – just because they were already reeling from the last few major shocks to their ecosystem.

Those shocks included the LendingClub come-apart as the spark and an increasingly interested looking pack of regulators coming to call.

And those big shocks themselves contribute to a problem that has been emerging for the last quarter or so – network effects running in reverse. As more loans than expected went bad in the fall of 2015, investor/loan buyers started backing away – which made it harder to attract desirable borrowers, which made it harder to attract investor/lenders.

A few years ago, marketplace-based online lending was being hailed as the the signature innovation that was going to upend traditional bank-based lending for consumers and small businesses everywhere. In the wake of recent struggles, increasingly loud voices have been wondering if perhaps the marketplace lenders aren’t actually well suited to exist outside of a set of fairly rarified market conditions.

Marketplace lending, in short, did not need more fireworks.

And yet more fireworks are exactly what they get – particularly the many that currently call London their home base.

The Brexit, most (though not all) agree, is bad news is for firms like Prosper, Zopa, Ratesetter and FundingCircle whose uncertain markets have become exponentially more so in the last few days. But – the experts are starting to note – SMBs may really end up being the biggest losers here since their already tenuous ability to borrow capital may end up in trouble.

And this may not be just a problem for small British businesses, since it looks entirely possible that this is a contagion that is coming across the pond.

Good-Bye Passports 

Online lenders in the U.K.’s main structural issue with the Brexit at present is a similar refrain across London based FinTech: with the end of the U.K. in the E.U. comes the potential end of passporting and easily doing business across borders. Passporting allows a financial services firm certified and licensed in any one EU country to operate across the entire 28-nation bloc.

England has a particular advantage within the passporting system, since the U.K. – when compared to the E.U. – has a much faster and more transparent licensing process. To be fully compliant in the U.K. on average takes half a year less than it does in the rest of the European Union. Combined with the fact that London was already a world financial city, the capital city of the United Kingdom was a desirable hub for up and coming FinTech firms.

But much of that desirability evaporates with the dissolution of the relationship with the E.U. –  if said passporting ability can’t be negotiated into future trade deals.  Many entrepreneurs have faced that threat with a threatened exit of their own – or techxit – to Ireland, or France or Scotland (if it jumps ship from the U.K. to get back on the SS E.U.) so they can maintain their intra-E.U freedom of motion.

Many innovators have noted that moving is a lot easier than staying in London.

“The math is the math, no matter how much we like London,” noted one marketplace lending exec on the condition of anonymity. “It is a lot easier to move to the 28-nation bloc and work our way back into the U.K. then stay in the U.K. and have to work our way back into a 28-nation bloc one country at a time. We’ll go to Dublin, we think a lot of other firms will do the same if passporting is out the window.”

Uncertainty Makes For Volatility 

The market for marketplace lending in the U.K., much like its U.S. counterpart, had already been rather volatile before the Brexit adventure really got going in earnest.

And now, the majority of experts agree, the market is so plagued by uncertainty that life has gotten particularly difficult for online lenders since people have become allergic to risk in the last 72-hours.

The theory is as follows – the Brexit, if anyone had the faintest idea of how it was going to be managed, probably wouldn’t be causing the turmoil it currently is.  Trade deals, after all, existed before the European Union.

But because no one has any idea what is going on and the plan for this seems as if it’s being written in real time – and no one is even totally sure if it is going to happen – the uncertainty is killing the markets.

And much the way investors want nothing to do with the stock market – particularly British firms – institutional investors may well become too freaked out to want to purchase loans through marketplaces as investment vehicles. And even if they did – they may not find borrowers to lend to, since data also indicates that SMEs in the U.K. may become historically uninterested in borrowing money for expansion.

Why?

Uncertainty.

If both the investors and the borrowers rapidly cool – as had already been happening in early 2016 due to other market factors – there are an awful lot of middleman lending platforms lacking two parties that even want to come together.

And In The U.S. 

The U.S. picture is much more of a mixed bag.  The short-term future is probably rough – because the markets have gone crazy – but analysts also think that the strong dollar and tendency to use U.S. currency as a haven could boost some SMBs (though admittedly could also wreak havoc on the bottom line of those that work across borders).

But the the alt lending markets in the U.S. may have gotten an unexpected bit of luck via the Brexit as well. Interest rates were widely expected to go up at the end of July – and U.S. alt lenders had found competing in a raised rate environment was harder than they had initially projected.  Said simply – they weren’t ready for the influx of competition from other investment opportunities.

But as of now, it looks like not only will the Fed not raise the rate come July – they will likely actually be cutting it again, so as to stop the influx of inflation. That could, ultimately, help those struggling online lending marketplaces gain some ground back (and strategize for what to do the next time the rates go up).

The situation remains opaque and by all account will for a while, but at least one thing is clear – for marketplace lenders, the world after the summer of 2016 will little resemble the world before it. It remains to seen how much the firms change to reflect the shifted world around them.