A Canadian fintech company is set to become the first online lender in the country to receive regulatory approval for so-called marketplace lending, which will connect investors to the borrowing needs of small businesses.
Toronto-based Lendified Holdings Inc. – part of a wave of financial technology firms that are promising to disrupt traditional banking activities – currently underwrites loans with its own balance sheet and a $20-million line of credit arranged through Liquid Capital Corp.
But starting Wednesday, Lendified's affiliate, Vault Circle, will flick the switch on a third source of funding: investors, who could eventually deliver the bulk of capital for small-business loans.
"This isn't a crowdfunding, $50-per-investor type of scenario. It's for institutional and accredited investors who understand the asset class," said Troy Wright, Lendified's chief executive officer.
Ideally, the new platform will boost Lendified's size and raise the profile of online lenders, a sector that is seen as an emerging threat to established banks because of its ability to get funding to small businesses fast and efficiently.
Some banks are now heading off the threat by partnering with the upstarts. Canadian Imperial Bank of Commerce, for example, has struck a partnership with Montreal-based lender Thinking Capital Inc. Similarly, Bank of Nova Scotia has partnered with Kabbage Inc.
Lendified is independent and headed by a number of former senior executives from Scotiabank, including Mr. Wright and Kevin Clark, the firm's president.
Although other Canadian online lenders have already used marketplace lending to fund their loans, the Ontario Securities Commission expressed some concerns about the activity last year. In response to those concerns, one company, Lending Loop, halted its appeal to small investors in March.
In a speech on Tuesday, OSC chair Maureen Jensen addressed the regulator's approach to fintech firms, announcing that a pilot project called OSC LaunchPad will help new companies navigate its regulatory framework.
"With OSC LaunchPad, we will work to tailor regulation and oversight to their unique business models, as long as investor protections are in place," Ms. Jensen said.
In the case of Lendified, the OSC has given the company the regulatory approval to seek qualified investors within the province, meaning Ontario-based institutions or individuals with financial assets of at least $1-million and income above $200,000 before taxes.
Mr. Wright expects that as regulators and market participants grow comfortable with this approach to funding, the investor base will expand nationally – although so could the competition.
Under the approach, qualified investors will buy short-term notes from the company, ranging in duration from 12 to 24 months. Lendified expects the notes to yield between 6 per cent and 8 per cent annually.
"We have the luxury of being able to take a look at what's happened in the U.S. and the U.K.," said Marcel Schroder, managing director and chief compliance officer at Vault Circle (and another former senior executive at Scotiabank). "The lack of volatility is what's made these investments popular with institutional investors."
On the other side of the deal, small businesses get the loans they need and Lendified gains another source of funding.
Marketplace lending has been popular for about a decade in Britain and the United States, underpinning the operations of large peer-to-peer lenders such as Zopa Ltd., LendingClub Corp. and Prosper Funding LLC. Foundation Capital, a Silicon Valley-based venture capital firm, believes the sector could originate $1-trillion (U.S.) of loans globally within the next decade.
The journey could be bumpy though: Orchard Platform, a data provider, reported in August that online lending to U.S. consumers fell 34 per cent in the second quarter from the first quarter as investors retreated from the sector amid concerns about rising defaults and lending improprieties at LendingClub.
It's still unknown if marketplace lending will take off in Canada. But Lendified has modest ambitions for the first year, suggesting that demand of $10-million to $20-million from investors would be exceptional.
"This will take some time to grow," Mr. Wright said.