Marketplace Lending:

A Maturing Market Means New Partner

Models, Business Opportunities
To maintain their impressive growth, marketplace lending platforms
should focus on providing greater security for investments and
transactions, venture into areas such as remittances, and set up
viable partnerships with traditional banks and fnancial institutions.
cognizant reports | July 2014

Cognizant Reports
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Executive Summary
Since the early 1990s, when the Internet and
online commerce began to take shape, peer-to-
peer (P2P) transactional systems have contin-
ued to evolve. Much like the Internet, they have
morphed from highly centralized, static online
platforms to widely distributed, autonomous
systems that span the spectrum from B2B and
B2C commerce (Amazon.com), to legal deal-
ings (compliance and reporting, loans) to music
(Napster) and online auction platforms such
as eBay. Needless to say, these pioneers have
radically changed how businesses and consumers
act, interact, buy, sell and service over the Net.
In the fnancial services industry, P2P frst emer-
ged in 2005 focusing on lending and borrowing.
P2P lending platforms, also known as market-
place lending platforms, offered an alternative
to traditional banking and payment systems,
since they cater to the underserved with services
like consumer lending, student loans, real estate
and small-business lending markets. While these
online providers create a marketplace for lend-
ers and borrowers, lenders expect a higher rate
of return on their investments compared with
simple transactions such as bank deposits. Borro-
wers who are unable to qualify for loans from
banks turn to these alternatives to obtain credit
possibly at a lower interest rate than they would
have received from their bank, based on their
respective credit profles.
Traditional banks, which until recently remained
confdent about their ever-increasing spreads,
are now paying close attention to these previ-
ously unconventional platforms. Lending Club
and Prosper, the two largest marketplace lend-
ers in the U.S., issued US$2.4 billion in loans in
2013. In 2012, they issued US$871 million in loans.
1

These fgures point to the impressive growth of
marketplace lenders. The apparent success of this
approach is now prompting banks to enter into
partnerships with digital lending marketplaces.
Other fnancial institutions and institutional
investors are also actively investing in market-
place lending platforms to realize better returns
and diversify the risk profle of their portfolios.
However, to realize the potential of this opportu-
nity (estimated to reach US$1 trillion by 2025),
2

marketplace lending platforms need to better
comprehend the choices and preferences
of their target users by analyzing the mas-
sive quantities of data in the digital market.
They also need to understand the types of loans
that borrowers/lenders are interested in, as well
as the factors driving default rates.
To deepen our understanding of marketplace
lending dynamics, we conducted a detailed study
in the U.S. surveying both borrowers and lenders
across a wide array of marketplace lending com-
panies, age groups and income categories. The
survey was conducted online among a nationally
representative sample of approximately 11,000
U.S. consumers roughly 701 of whom are market-
place lenders or borrowers during February and
March of 2014 (see our detailed methodology on
page 15). Our goal was to capture emerging trends,
as well as the current and future needs of lend-
ers and borrowers, to help organizations increase
the uptake of marketplace lending services.
The study identifed distinct sets of fnancial and
social characteristics of borrowers. These attri-
butes can serve as a benchmark when making
lending decisions.
From our fndings, we recommend that market-
place lending companies focus on vehicle and
small business loans, and provide more options
for lenders to analyze loans. They should
consider both fnancial and social factors while
categorizing loans. Marketplace lending busi-
nesses should also partner with banks to leverage
those institutions large branch networks.
Taking the Pulse of Marketplace Lending:
Key Findings
Our research also revealed the key challenges
that marketplace lending companies should
address, as well as features and functions that
must be developed to create a more prosperous,
more mutually benefcial marketplace:

Marketplace lenders:
Believe that lending through marketplace
platforms is risky, but are attracted by
the solid rate of returns, which range from
7% to 24% per annum.
Would be willing to lend more often if they
were provided with options such as imme-
diate liquidity of funded loans, securing
a part of the principal through insurance,
updates on the borrowers repayment track
record and, importantly, if the marketplace
platform was allied with traditional banks.
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Desire provisions for bad debts and legal
action against defaulters.
Are willing to extend domestic money
transfer/international remittance based
on the borrowers credit scores or per-
sonal guarantee. They believe that the
receiver of the money will repay the loan.
This can be a potential business model for
cross-border remittance companies.

Marketplace borrowers:
Seek lower interest rates compared with
banks, the opportunity to obtain loans
despite a poor credit rating, and a quick
and easy approval process.
Need physical branches and opportu-
nities for enhancing interactions with
lenders through the digital platform.
The Current State of Marketplace
Lending
such as eBays role in creating a so-called per-
fect marketplace where all parties operate on
equal footing by negotiating mutually acceptable
terms and conditions. As such, online auctions
have emerged as an effective market mecha-
nism for arriving at the correct value of an item.
Like its P2P predecessors, marketplace lending
bypasses the traditional intermediary the bank
by directly connecting borrowers with lenders
through digital platforms. The focus is primarily
on small loans, such as those related to credit
card debt. Marketplace lending platforms typi-
cally use proprietary algorithms to assess risk,
creditworthiness and interest rates.
These platforms have emerged to address latent
market demand for loans from borrowers who are
creditworthy but unable to qualify for loans from
traditional banks the reasons being as varied as
relatively low FICO scores, no current income, and
banks outdated credit scoring models. Interest in
marketplace services has also been fueled by lend-
ers looking for more attractive returns on their
Marketplace Lending: Market
Composition
Figure 1
Response Base: 701
N=701
Borrowers
39%
Lenders
37%
24%
Marketplace Lendings Initial Headwinds
The early days of marketplace lending were marked by turbulence. In 2008, the Securities and Exchange
Commission (SEC) sent a cease and desist letter to Prosper for selling unregistered securities.
This led to a legal precedent that specifes that marketplace loans must be registered securities.
As a result, numerous marketplace lending companies shut down.
Loanio is a case in point. The business worked on obtaining SEC registration after setting up just seven
loans. All the loans defaulted, and Loanio was unable to obtain any venture capital.
3
Compliance with
SEC regulations is a costly affair. For example, Prosper is spending US$1million annually on compliance,
and spent US$5 million to complete the registration process.
4
An analysis of the UK marketplace lending industry reveals that 35 marketplace lending companies have
launched since 2005. Of these, 10 have shut down due to high default rates a staggering 28% of the
total.
5
Another 10 companies were launched after May 2013. This suggests that an equal percentage of
marketplace lending companies do not have a long enough track record to make a judgment about the
quality of loans they generate.
Quick Take
Our research revealed key dynamics of market-
place lending. For instance, there is a group of
customers (24%) who borrow as well as lend on
marketplace platforms (see Figure 1) at different
points in time.
Traditionally, online markets have delivered oper-
ational effciency and transformed businesses
by bringing together buyers and sellers on an
unprecedented scale. Success stories abound,
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investment from alternative sources. Nevertheless,
despite its initial promise, the market has devel-
oped in fts and starts (see sidebar, previous page).
Although there is untapped demand for loans
in the market, there are inherent risks in any
lender-borrower relationship. The major expo-
sure in marketplace lending is loan default, which
can erode the lenders return on investment and
cut into the principal. Lenders therefore need to
understand the reasons for default.
Reasons for Defaults
The main reasons for defaults, according to the
lenders we surveyed, are unexpected expenses,
disruption in the borrowers earnings due to loss
of job or business, and lack of collateral security
and personal guarantees (see Figure 2, above).
Defaults reduce the creditworthiness of borrow-
ers. Receiving a future loan becomes next to
impossible; even if they receive a loan, borrow-
ers have to pay very high interest rates. Also,
they become part of the lowest category of loan
seekers. With this in mind, borrowers should do
their utmost not to default, especially if they per-
ceive the need for another loan. Borrowers cited
maintaining a good reputation with the lending
community, values and honor, and preserving
creditworthiness as reasons for not defaulting.
The default rate is also an important yardstick
for measuring the performance of a marketplace
lending platform. According to Prosper, a leading
marketplace player, its default rates range from
1.55% for the best-rated borrowers, to 16.7%
for its lowest-rated.
6
However, during the recent
economic recession, Prospers default rates
peaked at 30%.
Apart from the risk of default, lenders also fear
the lending platform going bankrupt. These
platforms do not have the government backing
that banks seem to have. Lenders still trust
the banks an incentive for banks to enter the
marketplace lending arena.
Traditional Banks Enter the
Marketplace Lending Arena
Reasons for DefaultingLenders Views
Figure 2
Response Base: 349
Agree Strongly Agree
42%
43%
48%
40%
52%
42%
46%
26%
26%
23%
32%
21%
33%
30%
37% 26% No legal action against default borrowers
43% 23% Lack of regulatory policies
43% 23%
Accountability is low among young and
unmarried borrowers
Repayment largely depends on loan terms
Repayment for the most part depends on interest rates
and closing fees
Defaults occur due to lack of collateral security or
personal guarantees
Repayment mostly depends on loan amount
Repayment largely depends on loan type/purpose of loan
Disruption to borrowers earnings or income
Unexpected expenses
Willingness to Lend on Marketplace
Platforms Run by Retail Banks
Figure 3
Response Base: 349
Yes
No 26%
74% 260
89
Yes No
In March 2014, the venture capital arm of Westpac,
one of Australia's largest banks and the second-
largest in New Zealand, invested US$8.5 million
in SocietyOne, Australia's leading marketplace
lending platform. The bank was among the frst to
directly invest in the marketplace space. At the
same time, Barclays Africa acquired a 49% stake
in the marketplace lending platform RainFin.
7

More recently, Lending Club announced a tie-up
with Union Bank. These investments speak for
themselves telling us that banks are seriously
interested in marketplace lending.
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Likewise, individual lenders are keen on lending
on marketplace platforms run by retail banks.
According to our survey, 74% of respondents
were willing to trust platforms run by retail banks
(see Figure 3, previous page). This might be due
to individual lenders long-standing relationship
with these institutions.
Banks with their own marketplace lending plat-
forms can choose to pass on certain loans to
the latter. Lenders who fnd marketplace lending
inherently risky (see Figure 4) would also be
attracted if the big banks were to get involved.
Borrowers, on the other hand, have expressed a
desire to interact with lenders. They also indicated
they would like marketplace lending businesses
to offer physical branches (see Figure 5). Both
of these needs can be fulflled when marketplace
lending services affliate with banks. Banks have
a large physical network of branches; they can
also help to facilitate face-to-face interactions
between borrowers and lenders.
Risks of Lending on Marketplace Platforms Compared with Other Types of
Commercial Lending
Figure 4
Response Base: 349
A full 47% of lenders indicate
that marketplace lending is risky.
The major reasons are lack of
trust in borrowers, lack of
security of investments and
absence of government support.
Risk of lending on
marketplace platform
compared to other
types of commericial
lending.
High No Difference Low
26% 27%
47%
Borrowers' Priorities for a Marketplace Platform
Figure 5
Response Base: 352
Third Feature Priorities: Second First
Branch availability for
marketplace lending
26% 20% 43%
Lender and borrower interaction 27% 17% 39%
Partnering with traditional banks 23% 30% 10%
24% 34% 9%
Online tools for portfolio analysis,
risk calculation, etc.
When banks enter the marketplace lending
space, can institutional investors be far behind?
Probably not. These stakeholders have already
shown interest in marketplace lending.
More than 80% of the loans issued by Prosper
in March 2014 were funded by institutional
investors. Furthermore, at least a dozen invest-
ment funds have been formed with the sole
intent of investing in marketplace loans.
8
This
suggests that the fnancial institutions that
marketplace platforms set out to bypass are
now investing in them. Institutional investors
are attracted by better returns, and the relative
stability and short duration of the loans. They
are also securitizing marketplace loans and
selling them to other investors. In September
2013, Eaglewood Capital sold a US$53 million
securitization of marketplace loans from Lending
Club to investors.
9
Other banks are exploring ways
to securitize marketplace loans into large bundles
that can then be sold to sizable investors.
Institutional investors are fnding other ways to
gain an advantage in this space. In some cases
they have set up servers near the marketplace
lenders premises to get a head start and provide
funding quickly, before other lenders. This tactic
resembles those of high-frequency traders, who
depend on speed for higher returns. In response,
Lending Club has set up speed bumps to limit
institutional buying.
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In May 2014, Lending Club announced a strate-
gic alliance with Union Bank. Initially, the bank
will purchase personal loans through the plat-
form; later, the two will join to create new credit
products for customers. Prosper also raised
US$70 million in venture capital in May 2014.
With so many institutions putting a stake in the
ground, the industry looks more and more like
online consumer lending.
Borrowers Classification
11
Based on Credibility
Figure 6
Response Base: 352
Note: The size of the bubble reflects the number of respondents in that group. The figures inside or outside the
bubbles indicate the percentage of respondents belonging to that group.
Low
High
Least Most
B
o
r
r
o
w
e
r
s

C
r
e
d
i
b
i
l
i
t
y

Preference
Disinclined
9%
Inclined
11%
Prudent
59%
Abider
21%
Factors Underlying Marketplace
Lending Decisions
Lending decisions are tough. This is especially
true in marketplace lending because the lender
has the freedom to choose the loans they want
to fund.
To help zero in on the major factors impacting
lending decisions, we identifed social and fnan-
cial variables as predictors. The social variables
represent peer group members ratings and
marketplace lenders endorsements. The fnancial
variables include the borrowers annual income,
debt-to-income ratio and credit rating. Our
statistical model
10
indicates that a borrowers
annual income and credit rating are the signifcant
So will the retail investor be left with any loans to
fund? We believe there is space for both institu-
tional and retail investors. Individual investors can
choose from the fractional loans on offer because
institutional investors would prefer whole loans.
We also believe marketplace lending platforms
must maintain a balance between retail and insti-
tutional investors to strengthen their position in
the industry.
Quick Take
predictors of default. Figure 6 presents bor-
rower groups based on borrower credibility.
A borrowers credibility is determined by his
annual income, debt-to-income ratio, credit
rating, peer group members ratings, and
marketplace lenders endorsements.
The abider group of borrowers is the most
preferred. The prudent group of borrowers
has the highest number of respondents and is
the second most preferred. The inclined and
disinclined groups carry the highest risk of
default. Each of these groups has a distinct set
of characteristics (see Figure 7, next page). These
characteristics can serve as a benchmark when
making lending decisions.
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The Lure of Marketplace Lending
Platforms
Characteristics of Different Groups
Group Characteristics
Abider
Rated very highly by peer group members (excellent).
Strongly recommended by previous marketplace lenders (excellent).
Debt-to-income ratio is less than 36%.
Credit scores are above 720.
Annual income levels above US$100,000.
Prudent
Rated highly by peer group members (good).
Recommended by previous marketplace lenders (good).
Debt-to-income ratio between 37%42%.
Credit scores between 660 and 720.
Annual income levels between US$50,000 and US$100,000.
Inclined
Rated fair by peer group members.
Least recommended by previous marketplace lenders (fair).
Debt-to-income ratio between 43% to 49%.
Credit scores between 600 and 660.
Annual income levels between US$30,000 and US$50,000.
Disinclined
Rated poor by peer group members.
Not recommended by previous marketplace lenders (poor).
Debt-to-income ratio above 50%.
Credit scores less than 600.
Annual income levels less than US$30,000.
Figure 7
Reasons for Marketplace Borrowing
Figure 8
Response Base: 352
Home improvement 30% 107
104
Repaying debt 30% 104
Paying bills
(credit card,
utilities bill, etc.)
38% 132
Figure 9
Response Base: 352
Comparison of Lending Institutions Loan Approval Rates
81%
66%
59%
54%
44%
40%
15%
26%
32% 33%
48%
39%
Marketplace
Lending Sites
Credit Card Family/Friends Credit Unions Traditional
Banks
Housing
Societies
Approved Rejected
Individuals use marketplace lending platforms
primarily to borrow money to pay bills (see
Figure 8). The other common reasons are home
improvement and repaying debt.
Borrowers typically turn to marketplace lending
sites as a result of their high approval rates
compared with other sources. Among those we
surveyed, 81% of loan applications were accepted
by marketplace lending sites versus 44% by
traditional banks (see Figure 9, below).
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Borrowers Wish List
Borrowers want physical branches and more interaction between borrowers and lenders (see Figure 10).
Borrowers have also shown an inclination to bor-
row for the long term to buy a vehicle or a house
against collateral (see Figure 12).
Borrowers Recommendations
Figure 11
Response Base: 352
Virtual interview with
potential lenders
12% 42
Looking beyond just
credit history, current
income and debt
31% 108
One-time approval
process
32% 113
Short, well-written
questions
33% 117
Quick approval 67% 235
Willingness to Borrow for the
Long Term (Beyond Five Years)
for Buying Vehicle/House
26% 66% Yes
8% No
No collateral Against collateral No
Figure 12
Response Base: 352
64%
Very Much
226 28%
Somewhat
98 8%
Not At All
28
Willingness to Borrow As a Group
Figure 13
Response Base: 352
82%
Fine
289
14%
Not Fine
51
3%
Dont Have
An Account
12
Willingness to Share Social Media
Profiles
Figure 14
Response Base: 352
Borrowers are amenable to subjecting their social
media profles to scrutiny; 82% have shown a
willingness to share their social media profles
(see Figure 14).
Features Sought by Borrowers
Figure 10
Response Base: 352
24% 34% 9%
26% 20% 43% Branch availability of marketplace lending site
27% 17% 39% Lender-borrower interaction
23% 30% 10% Partnering with traditional banks
Online tools for portfolio analysis,
risk calculation, etc.
Third Second First
The availability of online tools such as calculators
to compare interest rates across marketplace
platforms is also very important to borrowers.
They also seek quick online approval of loan
requests, a simple registration fow, and a
one-step approval process (see Figure 11).
Some marketplace lenders require cars as col-
lateral.
12
The car can cover any percentage of the
loan amount, not necessarily the full amount. The
borrower needs to deposit the certifcate of
ownership with the marketplace platform.
Borrowers are even willing to borrow in groups
and be jointly responsible
13
for all the loans (see
Figure 13). This can lead to lower default rates in
some cases the result of perceived peer pressure.
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Influencing Friends and
Others to Join the Peer Group
Figure 15
Response Base: 352
No Yes
Recommending
Friends & Others
88%
12%
Importance of Data Privacy
and Security of Marketplace
Lending Sites
Figure 16
Response Base: 701
Somewhat Important
Important
Highly Important
3% 36% 61%
Data Privacy &
Security Features
The importance of data privacy and security fea-
tures can be gauged by the fact that almost 77%
of borrowers and lenders are willing to pay a nom-
inal fee for additional biometric security features
(see Figure 18).
Willingness to Adopt Biometric Security
Features for Marketplace Transactions
Figure 17
Response Base: 701
Yes
No
87%
13%
Preferred Biometric Authentication
Method for Marketplace Transactions
Figure 19
Response Base: 701
Others
Fingerprint Matching
Voice Recognition
Facial Recognition
26%
27%
47%
Willingness to Pay for Biometric
Security Features
Figure 18
Response Base: 701
Yes
No
77%
10%
The preferred biometric authentication method
for marketplace transactions is facial recognition
(see Figure 19).
Borrowers also tend to encourage their family
members, friends and others to join marketplace
lending networks (see Figure 15).
Lending to groups can alleviate defaults (even
for borrowers with good peer ratings) because
peer pressure and community support would
work to counter the incidence of default.
While borrowing in groups is an important item in
borrowers wish lists, security of transactions is
the most important requirement.
The Security of Transactions
The security of transactions is a critical consider-
ation in any online business. This is especially true
in marketplace lending. The absence of effective
security features is a major deterrent for both
borrowers and lenders. An overwhelming 97% of
respondents consider security features and data
privacy important for marketplace lending sites
(see Figure 16).
Of those surveyed, 87% expressed a willingness
to adopt biometric security features for market-
place transactions (see Figure 17).
Lender Requirements
From lenders perspectives, returns of close to
zero
14
from traditional investment options such
as bank deposits make marketplace lending
platforms much more attractive. Lenders
believe marketplace lending allows them to
choose borrowers and have greater control
over their investments, and comes with the ease
and effciency of online access (see Figure 20,
next page).
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Marketplace platforms also allow lenders to per-
form their own analysis and choose their borrower.
They can create and use their own models to
make sure the default risk is minimized. Moreover,
marketplace platforms provide different buckets
of loans, based on their proprietary models.
Choosing a Borrower
Lenders are comfortable lending to someone
they know, since they believe the chances of
default will be small. In the absence of knowledge
of the borrower, lenders prefer to lend to those
rated
15
highly by the platforms because the risk
of default is less. They are also willing to lend to a
group of individuals who join together to request
a loan, believing that peer pressure on the syndi-
cate members will result in repayment of the loan
(see Figure 21).
The preponderance of loan default is an open
question since most loans issued on marketplace
lending platforms have yet to run their full course.
This could result in marketplace lenders reporting
higher-than-actual returns.
Wish List of Features
Any innovation in business is marked by new
features that set it apart from existing business
practices. However, once consumers are accus-
tomed to these attributes, they will demand more.
Reasons to Choose Marketplace Lending
Figure 20
Response Base: 349
1824 2534 3544 4554 5570
Others
Lower risk than capital markets
Alternative investment option to diversify funds
Help fellow borrowers who need the money
High rate of returns for investments
Quite easy and efficient with online access
Better control over investments
Option to choose the borrowers (whom to lend to)
Do not like to work with big banks/institutions
2%
1%3% 5% 5%1% 16%
2%3% 9% 13% 2% 29%
2% 5% 7% 13% 3% 31%
1%5% 12% 11% 3% 32%
1%5% 11% 17% 3% 39%
3% 8% 13% 15% 3% 43%
3% 7% 13% 17% 3% 45%
1% 2%
3%
1%
10%
2%
1%
Willingness to Lend to Individuals
Figure 21
Response Base: 349
Not Sure Very Uncomfortable Not So Comfortable
Comfortable Very Comfortable
Lending to someone you don't know 9% 61% 26% 64%
3%
1%
Lending to someone from the same community 8% 26% 42% 22% 77% 2%
Lending to someone with a good credit rating 19% 44% 30% 80%
3%
4%
Bidding on a competitive loan
listing that has lenders bidding
16% 46% 32% 73%
2%
4%
Lending to someone endorsed by
his/her friends & family members
17% 42% 35% 74%
2%
4%
Lending to a friend or family member 16% 54% 26% 87%
2%
3%
Lending to someone rated highly
by the lending site
19% 51% 22% 81% 6% 2%
Lend more often if the lending
platform is providing reasonably accurate
prediction of borrowers repayment ability
49% 32% 79% 14%
2%
3%
Lending to a group as a whole 16% 24% 78% 56%
2%
2%
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The key features lenders desire from market-
place lending platforms provision for bad debts, a
legal framework to deal with defaulters, partner-
ships with retail banks and minimum guaranteed
returns, for example (see Figure 22).
Preferred Types of Loans
Lenders prefer to fund loans for vehicles, edu-
cation, small business and home improvements
(see Figure 23).
Most marketplace loans do not involve collateral.
Although regulatory authorities require market-
place platforms to meet a minimum prudential
requirement, lenders can still lose most of their
money. Marketplace platforms have now begun
to issue small business loans. These loans are
also unsecured but require personal guarantees
by the business owner. In the future, marketplace
platforms may begin providing secured loans
backed by business assets.
7% 4% 2% Liquidity of investments
6% 1% 2% Recommendation engine for choosing the right loans
13% 8% 4% Online tools for portfolio analysis, risk calculation, etc.
15% 11% 5% Lender and borrower interaction
9% 14% 5% Deposit insurance like FDIC for bank accounts
9% 15% 5% Branch availability of marketplace lending site
11% 11% 6% Collateral-based lending
13% 13% 12% Minimum guaranteed returns
5% 7% 15% Partnering with retail banks
6% 5% 21% Legal framework for defaulters to comply
7% 11% 23% Provision fund for bad debts
Features Sought by Lenders
Figure 22
Response Base: 349
Feature Priorities: Third Second First
Marketplace Loan Types
Figure 23
Response Base: 349
Preferred loan types by marketplace lenders
36% 127
28% 99
28% 98
27% 95
18% 63
17% 58
13% 47
13% 47
10% 35
9% 33
7% 24
5% 18
2% 8
Vehicle loan
Education loan
Small business loan
Home improvement loan
Medical expense loan
Debt consolidation loan
Payday loan
Wedding loan
Mortgage
Unsecured debt
Secured loan with collateral not covered above
For domestic money transfer or International remittance
Others
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Opportunities exist for marketplace lending
platforms to offer loans for education and medi-
cal expenses. Both lenders and borrowers have
shown an interest in these loan categories
(see Figure 24).
There are marketplace lending platforms that
specialize in a wide range of niche loans, such
Opportunities in Marketplace Lending
Figure 24
Response Base: 701
Lenders Willingness Borrowers Willingness
36%
20%
Vehicle Loan
28% 28%
Education Loan
18%
28%
Medical Expense Loan
Purpose of Marketplace Borrowing
Figure 25
Response Base: 352
Paying bills (credit card, utilities bill, etc.)
Home improvement
Repaying debt
Medical expense
Education
Travel
Vehicle purchase
Wedding
Mortgage
Starting up a business
Domestic money transfer or
international remittance to family
Others
38% 132
30% 107
30% 104
28% 99
28% 99
25% 87
20% 71
10% 36
9% 33
8% 28
6% 21
1% 3
as payday loans, purchase fnance, education
fnance, real estate, merchant cash advance and
loans to small and medium businesses. Examples
of these platforms are Kreditech, Greensky, SoFi,
Pave, Realty Mogul, C2FO and Kabbage.
16
In April
2014, Lending Club acquired Springstone Finan-
cial, a platform for making marketplace loans
available to people undergoing elective surgery.
17

CommonBond connects student borrowers with
lenders. Most of these lenders are alumni who
provide loans at rates lower than current market
rates.
Borrowers turn to marketplace lending sites
mainly for paying bills (credit card, utilities, etc.),
home improvement expenses and for repaying
debt (see Figure 25).
According to the World Bank,
18
estimates indi-
cate that the international money transfer
(remittance) market will reach US$707 billion
by 2016 a large market opportunity by any
standard. Money transfer could represent a
signifcant business vehicle for marketplace
lending companies.
The Remittance Business:
An Opportunity
cognizant reports
13
Willingness to Make Domestic/Inter-
national Money Transfer Based on
Individual Credit Rating/Guarantee
Figure 26
Response Base: 236
Not Willing Somewhat Willing
Very Willing
Personal
guarantee
4% 31% 65%
Credit history 251% 48%
A majority of lenders (65%) are willing to make
domestic/international money transfers based
on personal guarantees. A signifcant (48%)
percentage of respondents are even willing
to make these transfers based on credit history
(see Figure 26).
The Way Forward
Our studys fndings offer insights that can
help marketplace lending platforms align their
strategies with lender and borrower requirements
and consolidate their positions. With this in mind,
we recommend the following approaches to help
them increase their market share:

Focus on vehicle and small business loans.

For vehicle loans, the vehicles can be used
as collateral. This provides a greater degree
of comfort to lenders. Similarly, for small
business loans, business assets can be used
as collateral. Not surprisingly, there is a sig-
nifcant demand for small business loans
following the global recession, since banks are
no longer providing these loans in volumes
that meet market demand.

Focus on loans for real estate and also

student loans. Our survey also found that
individuals interested in buying real estate
are willing to approach marketplace lenders
for loans in order to obtain better terms and
conditions. Some students opt for marketplace
loans; in many cases, they have few options.

Provide more options to lenders to analyze

loans. Flexibility in deciding who to lend to
is important. Marketplace platforms use
proprietary tools for classifying borrowers
(see sidebar, next page). They should also
provide suffcient data about borrowers,
as well as tools for performing an in-depth
analysis of this data. Lenders should feel
comfortable about the borrowers with whom
they transact. Lenders should also be allowed
to conduct a portfolio analysis of their invest-
ments in marketplace platforms.

Consider both fnancial and social factors

while categorizing loans. Social media indi-
cators, such as recommendations by peers
and past lenders, are signifcant predictors of
creditworthiness. These should be considered
before deciding on loan quality. Any borrower
with a strong social network but a high likeli-
hood of default should be encouraged to bor-
row in a group. Peer pressure and a sense of
belonging to a group can reduce the chances
of default.

Provide quick approval of loans. Our survey

confirmed that this is one of the most
Expectation of Repayment of Money
Transfer Loan by the Receiver
Figure 27
Response Base: 236
Repayment of
money transfer loan
by the receiver
Not sure No Yes
89%
6%
5%
Willingness to Borrow and Pay
from Marketplace Lending Sites
While Shopping
Figure 28
Response Base: 236
No Yes
92%
8%
Paying for
purchases
while shopping
Of those lenders surveyed, 89% believe that the
amount of money transferred will be repaid by
the receiver (see Figure 27).
Real-time money transfer is another feature that
borrowers desire; 92% of respondents indicated
they are willing to borrow from a marketplace
lender to shop (see Figure 28).
cognizant reports
14
important features desired by borrowers.
Application questions should be short and
well written; moreover, marketplace lending
platforms should follow a one-time approval
process.

Security of transactions. Biometric security

should be provided. Marketplace lending con-
sumers are even willing to pay for such a fea-
ture. This would also increase the adoption level.

Money transfer facility. There is a signifcant

demand for both domestic and international
money transfer. If this can happen in real time,
borrowers will receive immense benefts. Lend-
ers are willing to participate in money transfer
Improving the Lending Platforms
Most lending platforms use proprietary models to underwrite loans. These models are guarded closely
because they are the biggest differentiators in this industry. Platforms use various techniques involving
advanced analytics to ensure that the loan is underwritten based on accurate probabilities of default for
different borrower segments. The classifcation of loan types into different loan grades determines the
interest rates on each loan offer. Some institutional funds that invest in marketplace loans use artifcial
intelligence-based algorithmic techniques to fnd the best loans from lending marketplaces. Such
machine algorithms pick up the most signifcant predictor variables from the pool of available data
published digitally through these platforms. Each predictor variable is evaluated in complex combina-
tions with other co-related variables. Those variables are chosen because they actually impact return
on investment.
19
Lending platforms could therefore use artifcial intelligence in addition to the credit-
scoring models to make themselves more attractive to lenders.
Quick Take
based on the credit history of the borrower
and also on the basis of personal guarantee.

Leverage banks networks for a sustain-

able future. Both lenders and borrowers
have shown their inclination to lend/borrow
more with a marketplace lending organization
backed by a bank. Banks are considered more
trustworthy due to security of investment and
government support. Lenders/borrowers also
want more branches and face-to-face inter-
action with one another. This can be readily
provided by banks. The high failure rate of the
marketplace platforms can be signifcantly
reduced if banks get involved directly with
them.
Appendix
Study Methodology
This survey was conducted online among a
nationally representative sample of approxi-
mately 11,000 U.S. consumers, roughly 701 of
whom are marketplace lenders or borrowers,
during February and March of 2014. Data was
collected on marketplace lending and borrowing
perceptions, preferred features, attitude towards
domestic/international money transfer, and
major concerns regarding marketplace lending
and borrowing.
The analysis includes:

Important predictors of loan default.

Profles of borrowers based on their propen-

sity to default.

Features desired by both borrowers and lenders.

(See Figures 29 to 31 for respondents profle
details on the next page).
cognizant reports
15
Respondents Demographic Profle
Gender Annual Income
Figure 29
Age Geographic Region
East 33%
South 12%
Midwest 27%
West 28%
57% 43%
Less than 30K 8% Mean Median
3049K 11%
65.2K 75K
5074K 18%
7599K 41%
100149K 19%
Above 150K 3%
1824 5% Mean Median
2534 16%
38.3 35
3544 32%
4554 38%
5570 8%
Above 70 1%
Ethnicity and Employment Status
Figure 30
Ethnicity Employment Status
2% Student 4% Retired
1%
Home-
maker
22%
Self-
employed
Employed
68%
2%
Un-employed
60%
18%
12%
7%
1%
White
Asian/Pacific Islander
African American
Latin American
Others
Respondents with Bank Accounts, Credit Cards and Loans
Figure 31
Planning for Loan No Yes
Bank account 104 3% 97%
Credit card 10% 90%
5% 33% 62% Active loans
cognizant reports
16
Footnotes
1
http://www.economist.com/news/finance-and-economics/21597932-offering-both-borrowers-and-
lenders-better-deal-websites-put-two
2
http://www.foundationcapital.com/downloads/FoundationCap_MarketplaceLendingWhitepaper.pdf
3
http://www.p2plendingnews.com/2011/04/u-s-peer-to-peer-lender-loanio-to-shut-down-operations/
4
Peer to peer lending in the United States: Surviving after Dodd-Frank.
http://www.law.unc.edu/components/handlers/document.ashx?category=24&subcategory=
52&cid=923
5
http://www.p2pmoney.co.uk/companies.htm
6
http://online.wsj.com/news/articles/SB10001424052702303595404579318440300379408
7
http://www.lendacademy.com/two-big-banks-enter-the-international-p2p-lending-scene/
8
http://www.nytimes.com/2014/05/04/business/loans-that-avoid-banks-maybe-not.html?_r=0
9
http://www.ft.com/intl/cms/s/0/9a8e427e-2a07-11e3-9bc6-00144feab7de.html
10
We used a logistic regression model to identify signifcant predictors of default.
11
The classifcation of borrowers is based on a statistical technique called cluster analysis.
We arrived at four segments based on hierarchical clustering. Then, using K-means clustering,
we profled the segments.
12
http://www.wiseclerk.com/group-news/countries/germany-p2p-lending-with-cars-as-collateral/
13
If a person in the group defaults, there is peer pressure to repay. If he defaults, the member is excluded
from the group and fnds it diffcult to borrow in the future.
14
https://www.bankofamerica.com/deposits/bank-account-interest-rates.go
15
P2P platforms categorize borrowers based on their credit rating and proprietary credit models into
high risk to low risk. Returns for lenders are high for more risky categories and vice versa.
16
http://www.foundationcapital.com/downloads/FoundationCap_MarketplaceLendingWhitepaper.pdf
17
http://www.nytimes.com/2014/05/04/business/loans-that-avoid-banks-maybe-not.html?_r=0
18
http://www.worldbank.org/en/news/press-release/2013/10/02/developing-countries-remittances-
2013-world-bank
19
http://www.lendacademy.com/new-fund-uses-artifcial-intelligence/
Credits
Authors
Soumya Sen, Client Partner, Banking and Financial Services, Cognizant
Sanjay Fuloria, Ph.D, Senior Researcher, Cognizant Research Center
Analyst
Krishnakanth Sutrave, Researcher, Cognizant Research Center
Design
Harleen Bhatia, Design Team Lead
Suresh Sambandhan, Designer
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