One of the early dreams of peer to peer (P2P) lending was the theory that it could match borrowers and lenders from around the world. Borrowers in countries with less developed financial industries would be able to connect with investors from around the globe who have capital to lend. In theory, this P2P system would lead to higher and safer rates of return for investors, while providing cheaper capital for borrowers.
The reality is that connecting the borrowers and lenders of the world is easier said than done. Regulations are different between countries that can constrain where loans can be issued to, as well as limited information to evaluate borrowers, to name a few of the bigger problems. The result is that P2P lending is predominately taking place between domestic borrowers and investors, with little capital flowing to foreign hands. In addition, the bulk of loans on lending platforms are taking place in developed markets, which effectively have smaller needs of P2P lending. One of the driving forces behind this trend, is that in countries where there are difficulties in analyzing borrowers, credit tends to be limited.
The reality is that connecting the borrowers and lenders of the world is easier said than done
Aiming to create a solution to ‘blend’ the world’s borrowers and lenders is Israeli-based BLender. Pronounced as B-Lender or blender, BLender operates a P2P lending platform that uses non-credit score criteria to better understand its borrowers. Speaking to Finance Magnates, BLender CEO, Dr. Gal Aviv, stated that lenders rely on metrics such as credit scores to understand the risks of borrowers. However, Aviv explained that such information isn’t widely available in every country. Aviv added that this problem exists even within countries with developed financial markets such as France. According to Aviv, the result is that small groups, typically banks, control much of the information about borrowers, and are therefore enabled to have a large hold on the lending market.
To create a solution, BLender uses a borrower rating system that is based on non-credit score criteria. According to Aviv, the proprietary ranking system includes the evaluation of a borrower’s social footprint as well as their geographic location. Through this system, BLender gains a better understanding of the borrower’s traits and their risk. For investors, this means having access to information about borrowers, even in locations where consumer credit data is limited.
While BLender isn’t the only firm using non-credit score details to evaluate borrowers, they are one of the few P2P platforms with an aim to leverage this information to create a global platform. Having processed over $2.65 million of loans in the Israeli market since launching in November 2014, BLender has recently raised $5 million in a Series A funding round to assist in expanding their platform internationally. Led by Blumberg Capital, BLender’s other investors include an array of former and existing bank executives who see the future value of marketplace lending.
‘Blending’ Sensible Portfolios
As part of its business model and goal of scaling internationally, Aviv explained that the firm is focusing on ‘prime’ borrowers. Composed of consumer borrowers with low expected default rates, Aviv cited that despite the ‘prime’ name, this is actually a large segment of the borrowing population and is primarily based on people who have strong intent to pay back their loans.
In addition to targeting prime borrowers, BLender limits the size of its loans to around €7,000, with repayment terms averaging 2.5 years. The combination of sensible sized loans and borrowers with strong intent to repay, reduces the default risks of individual loans.
According to Aviv, having a business model that is focused on reducing risks, allows them to provide benefits to investors that few other platforms provide. Included is a provident fund to cover principal of loans that default. In addition, BLender has created a portfolio and secondary market features.
In regards to the portfolio, Aviv cited that this is viewed as an important part of their international plans. Using it, investors can select the type of loans and geographic location they want to have exposure to, such as electing to invest 25% in Latin America, 50% in Europe, and 25% in Asia. With their new funding, Aviv stated that their current plans are to expand their services in Latin America and Europe, in countries where access to borrower information is limited. For BLender, ultimately being able to provide investors with ‘blending’ of loans to create portfolios is part of the value-add that they believe they are uniquely bringing to the market.
Discussing the overall P2P industry, Aviv related that onboarding new borrowers is the greatest challenge. With borrowers engrained with the belief that ‘you get loans from banks’, Aviv stated that consumers are being educated that alternatives exist. For the overall industry, ultimately how long this education process takes is directly correlated to the growth of P2P investing.
In terms of BLender, Aviv stated that borrower education is a key part of their operations. In this regards, BLender is relating to borrowers not only the potential of favorable rates on their loans, but greater efficiency compared to banks. This includes online applications and no need for in-branch signing of documents.