|Luan Cox, CEO of Crowdnetic|
Less than a decade ago, the US investors were introduced to a nifty little concept called peer-to-peer lending. Qualified investors could pool their money together and lend to a borrower with the hopes of generating a nice return on top of helping out a stranger that usually was hoping to consolidate their credit cards, buy a car, or similar personal purposes. The concept was a novel alternative for most people, but one that did not really catch the attention of the traditional institutions or serious investors.
Fast forward less than 10 years later, and what was once known as “peer-to-peer lending” is now on the verge of revolutionizing the way everyone thinks about finance. Now known as “marketplace lending” to more accurate describe what the industry has become, this growing area of the financial markets is quickly spreading into the mainstream. The stakes are much higher and the deals are much bigger. From million-dollar real estate properties to funding new hot startups, the possibilities have become far greater than ever before imagined. But with that, like any industry, comes growing pains and the need to constantly establishing and reevaluating best practices for one of the most promising industries in the world.
As it does every year, the Crowdfinance Conference presented by Crowdnetic and Thomson Reuters hopes to bring industry leaders together to address many of these issues. Equities.com had the opportunity to catch up with Luan Cox, President and CEO of Crowdnetic to discuss Crowdfinance 2015: The Evolution of Global Marketplace Lending on September 28, 2015 at Thomson Hall, Thomson Reuters Financial District in New York City and what to expect at this year’s event.
EQ: The Crowdfinance events are always one of the best meeting-of-the-minds for this industry. It’s a gathering of some of the top leaders of this growing sector of the financial space. This is the third annual event. How has the conference grown in recent years to accommodate the Crowdfinance industry?
Cox: When we did our first event back in 2013, we were, obviously, on the heels of Title II being implemented. Obviously, so much has changed in both the crowdfunding for equity world and in the peer-to-peer lending world, which actually doesn’t even exist anymore. It’s called marketplace lending now.
But as we watched both industries grow up, originally, we focused on the equity side. But, more and more, we see it as both sides participating in more of a true ecosystem/continuum for how small businesses can get funding from startup phase to operations. So, historically, we've focused on and, I think, did a good job of teaching people about the opportunities in capital raising from an equities perspective under the JOBS Act as an industry more mature now to where it's important to also put a lot of focus. We do have a lot of the same people returning to our conferences and are really focusing on companies that have successfully raised capital, potentially through Title II and, hopefully soon, Title IV in the future.
We talk about how they can get either operating capital based on potential revenues, or getting that small-business loan that the SBA never provided. That's why we wanted to focus on this side of the world with Thomson Reuters being our partner. I always want to focus from a data mindset.
EQ: As you mentioned, this year’s event is shifting focus to emphasize on marketplace lending. When the JOBS Act first came out, everyone was excited for Title III provision for crowdfunding. Marketplace lending has overshadowed that as people started to realize its potential. Can you elaborate more on how this shift better reflects what’s going on in the crowdfinance industry?
Cox: Both our past events had some components of marketplace lending. Last year’s was almost half-and-half; but we've always had a very institutional approach to the technology and services that we provide in the space. What especially got our interest, and why we thought we should shine a light on it here is because of the advent of traditional financial institutions are, more and more, partnering with marketplace lenders.
We thought it was important to talk about it and look at that convergence which, up to this point, really hadn’t happened. Last year, it was still peer-to-peer lending. Then, clearly in the past year, we've seen a global push towards traditional finance and marketplace lenders.
We thought it was important and we still do have a segment for crowd funded equities that is, obviously, moderating; but, the institutional sort of entrance to marketplace lending is what made it interesting for us and Thomson Reuters.
EQ: What is it about marketplace lending that has created this environment of explosive adoption?
Cox: It's really a function of a few things. It’s a function of ease of use in that the application process is less painful for users. There’s also the timeliness of it. Decisions are made in a matter of minutes, days, weeks and months in the traditional sense.
When we see the likes of Goldman Sachs (GS) announcing that they're creating an online consumer lending platform; that just changes the whole paradigm. Of course, other banks are going to follow. All the banks are going to have to redo how they score and approve credit, and the speed in which they do it in order to keep up.
I think that is what is most appealing. It’s not obviously banks turning down 80% to 90% of loans. You've got technology companies who have been able to come online and figure out how to underwrite in a smarter way, and do it faster and fun. Then, add to that the asset managers and hedge funds hungry for yield already, and there's more capital to deploy than there is borrowers. This is an interesting phenomenon that needs to be looked at over the next few years. I think we can continue to see a convergence of the tech lending world versus traditional.
EQ: We're actually hitting an inflection point in that there’s potentially exponential growth beyond what we've seen already. Looking at this year's conference, what are some of the main topics and themes that you're looking forward to being discussed?
Cox: We like the entire concept of “disruption.” Again, I keep going back to financial institutions actually coming in now and, maybe in the next year, disrupting what was been disrupted. We’re lucky to have some really great panelists here. I think also looking at the marketplace lending world globally, which is also one of the reasons why we wanted to focus on marketplace lending at this event, you look at China and the UK and the US specifically. The growth is huge. China dwarfs the US, for example. The UK has been very pioneering. We’re lucky to have some folks from Cambridge and some leading platforms in the UK coming through to talk about what is going on there, especially from a regulatory perspective because they are leading. Then we might have some surprise guests from China.
EQ: As you mentioned, traditional banking is starting to take note. Before, marketplace lending was viewed as an alternative source from traditional sources. Now that traditional institutions are getting into the game, it’s starting to become a bit more mainstream. What are some things that you'd like to see happen, either from a regulatory, institutional or maybe even consumer perspective, for this to really ramp up?
Cox: That's a good question. I think more than anything, and obviously why Crowdnetic exists, technology and technology infrastructure in a standardized sort of format is what really has been missing. The regulators are doing everything they can and are doing a good job; however, up to this point, all of the platforms have really done a good job of creating their own technology to try to work with partners. But without a broader open environment and best of breed technology to plug in, this makes it hard for the borrowers to apply and for investors to easily invest.
Right now from an investing perspective, it's very time consuming. A lot of stuff is done manually. On the borrower's side, platforms are going out and partnering directly with banks and other non-banks to try and get referrals. Everybody is just sort of doing things one-off.
We are part of the movement. We think we'll have some interesting announcements at the event; but, what we'd like to see is a more mature technology infrastructure. When we have that, I do believe we'll have a sort of marketplace lending 2.0 where, new players, not startups necessarily, but legacy service providers, whether it's loan servicing or underwriting come into the fold.
EQ: Standardized data and technology infrastructure has been something Crowdnetic has been working on improving within the industry for years. But at the same time, we’re talking about an industry where new innovations, new concepts, and new approaches are being introduced almost on a daily basis. While that’s great, it does potentially create more fragmentation in the space. How do you, from Crowdnetic’s standpoint and as a host of the Crowdfinance events, go about rounding everyone together to standardize this industry?
Cox: Everyone has similar pain points, and everyone has things that differentiate themselves away from the competition. They all have their secret sauce. The pain points is what we have to get together on. That’s not anything that anybody needs to continue. There’s no reason that five platforms should build the same thing over and over again. Some think they do it better than others, and they do. It's hard for me to talk because we're going to make a big announcement that I can’t announce right now. What we've found is that the platforms are very willing to collaborate and to come together to solve mutual problems.
For more information, click the link for Crowdfinance 2015: The Evolution of Global Marketplace Lending.
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