Institutional Direct Lending Markets: new opportunities

In the recent Altfi "Peer to Peer Lending State of the Market 2019" report, Jonathan Segal, Partner at Fox Williams, predicted that higher value lending could be the next trend in P2P.  Madiston plc, digital banking and capital markets software provider, supports this view having seen new opportunities emerging in direct lending markets.

Jonathan Segal, a specialist FinTech and Alternative Finance lawyer, notes in the Altfi report that there has been an increase in the size of loans advanced to SME borrowers through P2P platforms recently.  That is attributed, in part, to an increase in institutional lenders working with them, lending the full amount of a loan or co-lending together with retail lenders.  Jonathan concluded "As alternative finance evolves, we expect both high-value or co-lending to continue, in direct challenge to traditional bank lending."

Madiston, too, has seen an increasing interest in highly automated, online unregulated direct lending markets for institutional use.  Various models for this are available, including within Madiston's own software, for markets such as:

Aggregated loans

Where various loan providers could place their loan originations on the aggregator direct lending platform to find new lending sources.

Institutional secondary loans

White-labelled platform for institutional lenders wishing to place their own pre-funded loans on a market for re-sale to release their funds for further investment.

Consolidated "packaged" loans

Institutions looking to combine loans into a single "package" to enable their investors opportunities to participate in specialist areas, reflecting the institutions niche expertise, such as business loans in emerging markets, shipping, property etc.  Areas that are not generally available to investors and attract high interest rates.  The specialist area will allow the institutions to charge a premium and still provide attractive interest rates to their investors.

Why do we see this as a growing trend for the industry?

1. Opportunities to establish such Institutional Direct Lending markets is easier now.  New entrants can learn from existing marketplace lending platforms whose high IT costs and large back offices, made reaching profitability a real challenge.  Instead, new entrants can avoid this by choosing modern digital lending software packages developed by experienced FinTech professionals, cutting down the time, cost and hassle for such a market launch.
2. Direct Loan Markets could also help institutions to lower the cost and capital requirements, while, at the same time, enhancing their liquidity, compared with their current operational arrangements, if any, for processing "smaller" loans.
3. Pricing variations from Licenced software for high volume, low value lending such as consumer loans, through to Platform-as-a-Service for those with low volume, high value loans for SME and property loans, give the flexibility for more institutions to get involved in online direct lending.

Creative institutions are now exploring a whole host of new opportunities to establish their own flavours of the direct loans market.