Credit activity on FinTech credit platforms around the world has generated significant interest in financial markets, among policymakers and from the broader public. However, there remains a level of uncertainty as to how FinTech credit platforms will develop and how they will affect the nature of credit and the traditional banking sector.

Against this backdrop, the Financial Stability Board (an international body that monitors the global financial system) has undertaken a global study analysing the function of FinTech credit markets and their potential benefits and risks.

The key takeaways from the FSB’s report (which can be found here) are:

  • A growing sector: In absolute terms, the largest FinTech credit market is China, followed at a distance by the United States and the United Kingdom. FinTech credit remains a small fraction of overall credit across jurisdictions but it appears to be growing rapidly and may have a larger share in specific markets.
  • Benefits: The benefits include lower transaction costs, convenience for users, increased credit access for underserved segments of the population or business sectors, and (in relation to financial stability) a lower concentration of credit with traditional banks and more pressure on those banks to increase efficiency.
  • Risks: The risks include: increased financial risk in platforms due to a greater credit risk appetite; untested risk processes and relatively greater exposure to cyber-risks; swings in investor confidence impacting the financial performance of platforms; and (in relation to financial stability) lower lending standards, incumbent banks taking on more credit risk in response to competition, securitisation increasing the connection between traditional and FinTech credit and the challenges posed to the regulatory perimeter.
  • Business models: The nature of activity varies greatly across and within jurisdictions due to the diverse business models used. These models include: the ‘traditional P2P lending’ model (a borrower-lender matching service with the platform often providing a risk assessment); the ‘notary’ model (a matching service where the loan is originated by a partnering bank - Germany and Korea); the ‘guaranteed return’ model (the platform guarantees a return to lenders – prevalent in China); the ‘balance sheet’ model (the platform originates and retains the loans on its own balance sheet – Australia and Canada); and the ‘invoice trading’ model (factoring services to manage cash flow for the start-up and small business segments).
  • Sources of funding: P2P lending platforms originally matched private lenders with borrowers but many platforms are broadening their investor base to include institutional lenders, particularly in the US and Canada. Securitisation capital markets have become an important source of funding for FinTech credit platforms in the US. Cross-border funding is higher in Asia Pacific (ex-China). The average retail investment is around US$8,000 in China but, due to regulatory caps, only €500 in France.
  • Borrowers: FinTech credit is mainly segmented into private consumer loans and business loans with debt refinancing or consolidation being the most common purpose for consumer loans. The available data suggests that consumer loans are typically in the range of US$5,000 to US$25,000 with the US at the top end of that range. Average loans in China are much larger, at more than US$50,000.
  • Interactions between banks and platforms: Interactions between the incumbent banks and FinTech credit platforms are becoming increasingly common and can include: operational services (banks providing payment, settlement and custodial services); loan origination (platforms using banks to originate loans on their behalf); direct investment (banks providing equity or debt financing or establishing their own lending platforms); or partnership agreements (banks using platforms for their own credit assessments or referring borrowers who have been denied credit to platforms).

New Zealand was at the forefront of the regulation and licensing of peer-to-peer lending platforms when the Financial Markets Conduct Act 2013 came into force back in early 2014. The FSB’s report includes a discussion on the regulatory responses to P2P lending across a number of jurisdictions. These responses include the licensing of platforms (like in New Zealand), the imposition of regulatory caps on lending by retail creditors, and increased capital adequacy requirements for platforms as lending volumes increase. To encourage market growth a number of jurisdictions (China, France and the UK) have introduced tax incentives for investors in FinTech credit platforms. The report also notes the use of regulatory sandboxes, innovation hubs and accelerators to assist new firms to navigate the regulatory requirements and test new technologies.

The FSB report’s summary of the global P2P lending market highlights the inevitable challenges for New Zealand platforms of relative scale and limited access to diverse funding sources. At the same time, the identified trend towards increasing interaction between banks and platforms is already happening in New Zealand and Australia – creating opportunities for both traditional institutions and innovative technology businesses. Skilful execution of a market-appropriate business model, combined with a sensible approach to risk management, is likely to see some partnerships create real value in the New Zealand financial services sector.