Marketplace Lending Goes Off the Grid

Since our inception, FSV has mainly focused on making investments in the U.S. and other developed economies. One of our newest portfolio companies, Lendable, is a notable exception: Lendable provides risk analytics and structuring solutions to connect loan originators in the developing world with the global debt capital markets. At the same time, we view Lendable as a natural extension of some of our core investment themes to new geographies. Indeed, like some of our U.S.-based partners, Lendable is harnessing next-generation analytics and capital-efficient marketplace models to help clients lend to customers that previously could not be served.

Even as marketplace lending has taken off in the first half of this decade, with some analysts expecting annual loan volumes to approach $300 billion by 2020, the reach of these online platforms has been largely confined to the U.S., China, U.K., and a handful of more developed markets. In the developing world, the difficulty of underwriting consumers and small businesses with little to no formal financial history, and the absence of credit bureaus or even reliable methods for verifying identities, has for the most part limited institutional credit channels to cooperatives and microfinance institutions. Recently, though, the growth innovative models like pay-as-you-go (PAYG) financing, in which consumers pay for or lease durable goods in small increments predominately over mobile phones, has begun to change the equation. PAYG consumer purchases lower the cost of collections for lenders and improve the credit quality of customers by financing assets that improve customers’ well-being and financial health. 

Perhaps the most prominent example to date of PAYG finance in the developing world is the off-grid solar market, where dozens of companies are bringing small solar-powered systems to the more than 1 billion households without access to conventional electricity. Off-grid solar solutions allow energy-poor customers to charge mobile phones, light their homes, and replace expensive and dangerous forms of energy like kerosene, batteries and diesel. While solar costs have come down dramatically, individual home systems can still run from several hundred to as much as a thousand U.S. dollars. Distributors therefore face an up-front financing need when selling to customers earning a few dollars a day.

PAYG and asset financing, often enabled by mobile payments, has the potential to make electricity affordable for off-grid households worldwide by matching payment to consumption of energy. Some of the early PAYG solar companies have attracted millions of dollars of equity investment from venture capitalists and energy firms to serve a market that could eventually reach $50 billion. And solar is just the beginning—similar models are being used to finance everything from motorcycles to agricultural equipment, assets that allow the borrower to displace expenses or generate more income right away. 

The biggest constraint to growth in the PAYG and asset financing markets today is debt capital. These businesses will demand massive amounts to finance their customers—off-grid solar alone will require an estimated $40 billion in lending capital through 2030. Though risk/return characteristics are attractive, frontier market asset finance is a nascent asset class that most fixed income investors do not yet understand, and no meaningful infrastructure to finance receivables exists. As a result, originators are struggling to get the debt financing they need to grow.

Enter Lendable, a dynamic team of experts in development finance, analytics, software engineering and financial marketplaces. They’ve already conducted risk analysis on some of the first securitizations in off-grid solar and have amassed the largest database of customer-level transactions in the space. They’re currently completing the first deals in the Lendable Marketplace, a portal in which investors can purchase receivables across multiple originators. The Marketplace offers a standardized and replicable structure for financing asset-backed loan books, informed by Lendable’s proprietary credit and portfolio risk engine and supported by an online portfolio monitoring dashboard and back office resources. We’re excited to help Lendable fulfill their mission of unlocking large-scale debt financing for some of the most innovative and worthy businesses operating in the developing world today, and we’re proud to welcome them to the Fenway Summer family.