Credit platforms give out loans that are directly financed by private or regular investors. In this way, they provide access to finance for consumers and businesses, open up a new asset class for investors and contribute to the financial inclusion.
Now that the four largest credit platforms in Germany, auxmoney, creditshelf, Funding Circle and Kapilendo, have joined forces and founded an association. It is intended to set binding standards for online credit financing platforms and to give the industry a common voice – also politically. This association wants to actively accompany the regulation of alternative financing providers by sharing important insights on how the industry works.
The association is based in Berlin and is being guided by a representative of each of the founding members: Phillip Kriependorf (auxmoey), Ralph Pieper (Kapilendo), Marc von Ammon (creditshelf) und Pelin Wolk (Founding Circle).
Wolk is acting as managing director of the association. We spoke to her about changed financing options, about fair competition on the German credit market, about the goals of the association and necessary standards.
Why was the foundation of an association necessary, which “gap/discrepancy” did you perceive stronger?
In recent years, the volume of credits that were given out has risen steadily and the business models of the providers have developed further. It became clear that the credit marketplace model differs from other alternative forms of financing in several decisive aspects. In addition, several regulatory initiatives at European and national level are currently in process, which are relevant to us. With the growing relevance of the industry, the need to represent our interests in a coordinated manner is also growing.
What are your demands as an association?
In general, this is a fair competition on the German credit market, i.e. primarily the willingness to consider whether the regulatory framework for credit platforms in Germany can be made less complex. For example, in Germany one needs a banking license to conduct credit transactions. Compared to international standards, this is an absolute exception.
As an association, we also represent the interests of our customers, borrowers and investors. It is in the logic of the credit market model that added value must be created on both sides. In this respect, we are committed to being able to arrange loans even more quickly and easily for loan seekers in the future in a fully digitalized process.
This is under the current rules not possible. We also want to stand up for the interests of our investors. A very concrete example here is that there is no possibility for our private investors to deduct their losses from loan defaults from their capital income. This has a significant impact because they have to pay full tax on interest income without being able to deduct losses from loan defaults. This would be an important improvement for investors investing in and supporting consumer and midsized companies loans.
In which areas do you want more to be heard more?
Above all, we want to achieve a deeper understanding of our business model among policy makers, regulators and other market participants. When people hear the word “credit”, they automatically think of the traditional bank and draw conclusions about the platform model. The product for the borrower is first of all a completely normal annuity loan but looking at the risk structures and the financing conditions etc. there are partly clear differences. On the other hand, direct financing by private and regular investors is often equalized with swarm financing such as crowdfunding and -investing. However, these are typically based on equity and therefore have a completely different risk profile as a financial investment. As an association, we want to draw more attention to the special features and strengths of our industry so that these can be taken into account when drawing up sensible rules.
The association should represent the interests of credit platforms as well as their borrowers and investors and strengthen confidence in the industry – how do you intend to do this?
Through education and transparency. In addition, the association members commit themselves to uniform industry standards in online lending business. These should be seen as a voluntary commitment on the part of the industry to promote high quality in the credit platform business and thus create the prerequisites for the successful development of the industry. Money is a sensitive issue and credit transactions require a minimum of trust.
As a young industry, we must make even greater efforts to promote this through a clear commitment to uniform high standards and transparency. What we commit ourselves to is publicly available on our website. Concrete examples are uniform transparency standards for our customers with regard to fees, so that there are no hidden costs. Or the obligation to take precautions in the event that one of the platform companies shut down operations so that investors receive their money back.
Another important point is risk management. A special feature of platform lending is that credit risk management is performed by the platform. Uniform standards for the publication of suitable key figures, in particular credit default expectations, as well as a comprehensible explanation of their occurrence enable investors to make well-founded investment decisions. These are fundamental points for meeting the quality demands of investors and borrowers and strengthening confidence in the industry.
You demand uniform quality standards for the banking industry. What is the “actual” state and what should it be in the future? What do you have in mind?
Our industry is still young, which means that the best approaches and industry practices have only established themselves in recent years. The standards, to which the members of our association have committed themselves to, are the result of the practical experience of the four largest credit platforms in Germany and can be seen as a good starting point for further discussions. Ultimately, the agreed rules should also serve as an orientation for future new market participants. This will create lasting trust on both sides of the marketplace and contribute to the development of a successful alternative financial industry in Germany.
We operate in a particularly dynamic industry, so we must of course bear in mind that new technologies and digital innovations will also require further development of our guidelines in the future. Certainly, further standards will have to be adopted and existing ones refined. However, this can only be done in close cooperation with all market participants.
“New standards can be adopted only in cooperation with market participants.”
What are your next steps?
As mentioned, there are several regulatory developments that affect us and that we need to address. These include the planned transfer under 34f GewO of licensed financial investment intermediaries under Bafin supervision and the draft regulation for crowdfunding service providers at EU level. We welcome both initiatives and would like to do our utmost to ensure that they are developed and successful in the interests of all concerned. In addition, we are looking for a suitable person who is enthusiastic about the alternative financing industry and can take on the tasks of a managing director in the long term. At the moment I am still temporarily in charge of the association’s business.
Another issue is that there are currently no reliable figures on the credit platform industry that would allow outsiders to make a realistic assessment of the market and relevance. As already mentioned, clarification and transparency are particularly important to us. We are therefore working on a comprehensive market report on the credit platform industry, which we intend to publish in 2020. For the first time, the report will contain current figures and statistics as well as a market analyses on the sector Germany.
What interest do established banks have if credit platforms are also gaining more and more political importance?
So far, there haven´t been any talks with the banking industry, so I cannot say anything about that. However, I do not believe that there are any significant conflicts of interest, because we are only focused on a part of the lending business that has only limited economic relevance for the banks. Banks have a much larger radius of action and are able to serve a broader customer group, while we are clearly concentrating on lending business with consumers and SMEs. Some banks also cooperate successfully with credit platforms, either as partner banks through which loans are extended, or as investors who invest in consumer- and corporate loans through credit platforms and thus generate attractive returns.
This is a relevant investment strategy especially in low-interest phases such as this one. And as an industry association, we also stand up for the interests of our partners and customers, borrowers as well as investors. At the same time, there are also interests that are quite similar and that we can represent together. One example is the already mentioned loss deductibility in the case of loan defaults for private investors. This is a topic on which we can imagine becoming active together in the interests of our investors.
How important will it be as an association to communicate to society in order to improve the image of loans and especially of “loans from the Internet”?
Loans are a basis for economic growth. With debt financing, companies can make investments and implement new ideas, also new money flows into the economy through consumer loans. Loan platforms enable private and institutional investors to invest directly in private or corporate loans, giving credit seekers access to urgently needed finance. In this way they improve the supply of loans, promote financial participation and make an important economic contribution.
The fact that lending makes a significant contribution to the positive development of the economy is not sufficiently taken into account in the public debate. In 2018 alone, the four largest credit platforms in Germany brokered more than 1,400 corporate loans and 73,000 consumer loans with a total volume of around 728 million euros. This may not be much compared to bank lending, but the money has a positive influence precisely where financing would not have been possible without the platforms. As an association, we need to create more attention by making our contribution to the economy more visible.
Of course, digitization of financial services, which has long been a reality in the consumer sector, also plays a role. However, digital corporate credit is an important building block for many self-employed persons and small and medium-sized enterprises who expect and need fast and uncomplicated application processes. Banks, too, are now continuing to reduce the size of their branch network and are focusing more on digital products.
“The digital corporate loan is an important building block for many self-employed and small and medium enterprises
What goals do you want to have achieved in a year from now?
In a year’s time, we want to have made big progress towards a better public understanding of our business model and have firmly established ourselves as the central lobby of the credit platform industry. Above all, this means that we want to increase public awareness of the industry, significantly intensify the exchange with regulators and political decision makers and ensure the important flow of information from the industry to politics.
Are there any plans to position oneself internationally (EU-wide)?
We are currently positioning ourselves clearly in the German market. Depending on how the regulatory framework develops at EU level, it may make more sense to expand our radius of action and make a cooperation with other European industry associations more relevant. Of course, we also keep an eye on developments across German borders and with Funding Circle we already have a member company that is active in several EU countries. However, no exact steps are currently planned.
