2016: A break-out Year for On-Line and Marketplace Lending in Canada / by David Fry

Breaking out in 2016

2016 was a strong year for Canadian FinTech companies, from both growth and funding perspectives.  The Globe and Mail recently reported that Canadian FinTech companies raised close to $265mm in funding in 2016, up 74% from 2015, to the highest level since 2000.  Also of note is that this increase in funding for Canadian FinTech companies was in stark contrast to the trend see in both the US and UK, where investment in FinTech declined 25-30% from 2015 levels.  Even though the absolute volume of FinTech investment in Canada remains small compared to similar US and UK figures, the trend for FinTech investment in Canada continues to be upwards.  From a slow start, Canadian consumers and businesses are gradually embracing FinTech products and solutions, and investors are backing the FinTech companies positioned for this increasing FinTech adoption.

One group of companies that represents a significant sub-sector of FinTech in Canada, is the on-line, or Marketplace Lending (MPL) sector.  Aspire is well positioned in this sector as a Data and Analytics platform to MPL participants, including our Canadian Data Partner, Progressa.  2016 was a break-out year for this sector, with a significant number of transactions worth highlighting.

2016 Highlights

Our vote for Canadian FinTech lender of the year (if there was such a thing!), and also FinTech deal of the year, would go to Financeit.  Financeit purchased over $400mm of Home Improvement assets from TD Bank this fall, after completing 2 equity financing rounds during the year, led by Goldman Sachs and the Prisker Family.  Debt financing for the TD deal came from Concentra, who continues to expand their asset base in the Alternative Lending sector in Canada.

Bank/Fintech partnerships dominated the Canadian landscape in 2016:  Borrowell partnered with CIBC, Thinking Capital with BNS, Lendful with Alterna Bank, Grow with several BC and other western Canadian credit unions, and US SME lender Kabbage partnered with BNS.  If you can’t beat ‘em, join ‘em, seemed to be the motto for both FinTech lenders and banks.

SME lender Lendified became the first Canadian Marketplace Lender since CommunityLend (now Financeit) to apply for and receive an Exempt Market Dealer license to sell debt securities backed by Lendified SME loans to Accredited Investors, under the new OSC Launchpad initiative.

Elsewhere, we saw equity financing rounds for Progressa, Fundthrough and Healthsmart, IOU Financial launched in Canada, Wellspring was re-born as Flexiti, and First Access, a non-prime auto lender based in Alberta, expanded their funding base with credit facilities provided by ATB and Ares Management.

Avant came and went in Canada during 2016, although their departure was less a reflection of the value of the Canadian opportunity, and more one of a refocus on their domestic business.

Bank Partnerships dominate

As noted above, 2016 saw several Canadian financial institutions partnering with Cdn FinTech lenders.  The FI rationale for this is relatively simple.  First, despite a rumour of their untimely demise in 2015, Canadian banks in fact are alive and well, and are certainly not lying down and handing over their best customers to FinTech upstarts.  Partnering with FinTechs is a simple way for banks to retain customers, dip a toe in the FinTech water, and show shareholders how forward-thinking the bank is.  The second reason these deals make sense is that like fixed income investors around the world, FI’s are starved of yield generating assets.  Based on our discussions with many of the banks in Canada, the desire and rationale for these deals continues to be strong.

Regulation

The creation of the OSC Launchpad in 2017 was a big deal for Ontario, and for FinTech more broadly in Canada.  Having a “Regulatory Sandbox” where FinTech companies can operate, test their business models, and coordinate potential regulatory requirements directly with the regulator, shows a lot of forward thinking for a regulator and brings Ontario “up to code” with other jurisdictions like the UK, Singapore and France in launching this initiative.  This should really benefit those companies in the FinTech sector targeting investors for capital, in the future.    

Expectations for 2017

Based on what we saw in 2016, and on-going dialogue and interaction we have with the vast majority of participants in the Canadian on-line and MPL lending sectors, we have a few predictions for 2017:

1.       More bank partnerships.  As mentioned above, many Canadian banks continue to be interested in partnering with FinTech companies in Canada, for both customer retention, or asset acquisition purposes.  On-line and MPL lenders are equally keen to participate in bank partnerships to shorten the borrower acquisition time window, and/or help fund and scale their loan books.  We expect this to drive more deals in 2017. 

2.       Increased institutional participation.  We anticipate further institutional participation in the MPL space in Canada, particularly on the loan purchase/funding side.  With this, will come an increasing requirement for institutional process and infrastructure, which we believe will further drive requirements for 3rd party data, analytics and reporting providers.  In addition to this, we believe that we will see many of the MPL Originators evaluating their own cost structure for these functions, and will look to further outsource them in 2017.

3.       One (or two) IPOs?  While neither the US nor Canadian IPO markets for MPL lenders showed anything but disappointment in 2016, there is the potential that US MPL lender SoFi gets an IPO done in 2017, and this in turn could provide the foundation for one or two of the names above, to IPO in Canada.  Valuations though will likely be much more based on these companies as lenders, vs. pure technology companies.

4.       Asset performance will be tested in the US.  Credit performance of US MPL loans in 2017 was generally as good as that seen in off-line balance sheet (credit card) credit cohorts in 2016.  However, performance of unsecured assets (both on and off-line), particularly for non and sub-prime assets began to show an increased loss profile vs. expectations in Q4.  It will be worth watching to see if this deterioration in performance is just a blip, or the start of a weakening trend.

5.       Consolidation in the US; not in Canada.  Given the multitude of Originators in the US MPL sector, and the equity funding difficulties that exist today, it’s likely we’ll see a continuation of consolidation of participants in the US space.  We don’t think the same happens in Canada though, given the relatively nascent evolution of the Canadian space, and the fewer number of players, and in fact think we are likely to see more participants in Canada in 2017.

6.       A Canadian pension fund invests strategically.  While it’s still somewhat early for pension funds to be actively participating in this space, it wouldn’t surprise us to see one or two data points in 2017.  On-line and Marketplace Lenders (FinTech) represent an interesting opportunity for both the VC and fixed income areas of the large pension funds.  Like other large global institutional investors, Canadian pension funds are starved for yield.  Also, they haven’t been shy about funding or buying lenders in other sectors, and we think that potential exists in this space as well.

7.       Regulation.  The OSC has led the way with securities regulation for FinTechs, and we wonder if OSFI will be looking to do something similar in the financial institution sector.  In the US, the OCC recently announced a new “FinTech Charter” that would essentially provide an avenue for MPL Originators to become regulated as national banks.  The UK regulator has also taken a very pro-active approach with FinTechs, with it’s PSD2 directive, which will force banks to open up their systems to FinTechs through an open API, allowing FinTechs to become intermediaries between banks and their customers.  OSFI is no doubt taking note of these developments, and the increasing push from FinTechs to create a digital bank, that looks nothing like the bank of the past.

In summary, we believe that 2016 was a break-out year for On-line and Marketplace Lending in Canada, as evidenced by the many factors above.  The sector in 2017 will be interesting to watch with the many tailwinds behind it now, which is likely to make for an exciting year!

Best wishes for a Happy New Year, and a successful 2017.