Britain is the acknowledged pioneer in online alternative finance, with many firsts to its name in both P2P, or marketplace, lending as well as in equity crowdfunding. In a number of important areas, however, the US has been ahead of the UK for a while and if recent announcements are any guide the gap seems to be widening.

 

For one thing, the mix of institutional and retail funding on US marketplace lending sites has moved much more quickly in the direction it will need to go if this kind of alternative finance is ever to be more than a niche phenomenon. Institutions account for around 80% of all marketplace lending in the US, against 40%-50% in the UK. This well may be due to the differences in regulation between the two markets, which have forced US platforms to limit themselves to a relatively smaller pool of accredited retail investors, and to comply with a fragmented set of rules that differ from state to state. In the UK, by contrast, the broad retail investor market has been accessible from day one and, as the UK is a small nation the platforms have only ever had to worry about one set of (to date fairly undemanding) rules.

 

The need to make themselves “institution-friendly” from the outset make also explain why more seems to be going on in the US in another key area of interest: tie-ups between major mainstream lenders and alternative platforms. The Kabbage deal with Santander, ING and Scotiabank (see the earlier blog here) is one significant recent example. Now it’s been followed by news that Chase, the main US business banking arm of JP Morgan, is to pilot a tie-up with online business lending platform OnDeck Capital starting in January that will see Chase business customers offered loans using OnDeck’s technology.

 

OnDeck was keen to tell the market that it was to be Chase’s partner – and its rather soggy share price duly jumped – but the details of this deal are revealing. Chase will provide the borrowers from its 4m small business customers as well as the funds. OnDeck will provide the technology platform. But most important, the brand that customers see will be Chase. This is a straightforward white-label deal that will see OnDeck supply its technology to Chase, saving the bank the bother of building something for itself. The comments that appeared in the FT by Jenn Piepszak, Chase’s head of business banking, were also very telling. “It is not a question of friend or foe…We clearly bring scale and customer acquisition to the table; what they offer is a disruptive customer experience that is very complementary with our existing services.”

 

To my mind, that phrase “disruptive customer experience” is key. The really disruptive element of what most alternative finance offers to small businesses is the experience of dealing with the lender. It’s faster, easier and the products are more flexible. Chase shows an admirably clear-eyed assessment of the potential threat that online lending platforms pose and a readiness to engage directly with the newcomers in order to work out how far it can replicate that customer experience.

 

How close are we to seeing a similar alliance in the UK? There are certainly plenty of conversations going on between platforms and banks, but nothing much as yet to show for them. The interesting question is whether this is more of a problem for banks or for platforms.

 

I’m not certain of that, but two things, at least, seems obvious. First, it will be hard to pitch yourself as the technologically disruptive successor to traditional finance if you are simultaneously operating as its software supplier. Second, business-to-business software suppliers do not tend to attract Unicorn-style earnings multiples.