Marketplace Lenders Navigate The Choppy Waters Of Compliance

Regulators the world over are beginning to take a closer look at the alternative and marketplace lending business model. An explosion of FinTechs looking to fill the gaps left across under-banked and under-financed populations, including, in many markets, small businesses, has watchdogs exploring how to promote financial inclusion and access to capital while maintaining borrower protection.

The current regulatory climate remains in its relative infancy for this industry, so marketplace lenders are not only tasked with maintaining compliance but diligently tracking the regulatory landscape to forecast new and changing rules.

In the U.S., the Financial Trade Commission opened an investigation into the merchant cash advance sector and other alternative financing products for SMBs as the government weighs broadening consumer borrower protections to include small firms.

In June, the U.K.’s Financial Conduct Authority announced plans to impose stricter restrictions on marketplace and peer-to-peer (P2P) lenders beginning this December following the watchdog’s decision to place P2P lending platform Lendy into administration — a result, the FCA said, of the industry’s lenient requirements to disclose governance arrangements and controls.

Also, in China, analysts at Yingcan Group pointed to the government’s P2P and marketplace lending crackdown as being likely to shrink the industry by as much as 70 percent this year.

Industry players will continue to face tighter regulations, but according to Kim Wales, founder and CEO of CrowdBureau, a company that aggregates marketplace lending industry data to establish performance and risk management benchmarks, operating within the confines of the law is a complicated task for this sector.

“Compliance is not just about recognizing key regulatory pressures [on] digital marketplace lenders,” she told PYMNTS in a recent interview, “but also proactively ensuring a company is improving its processes and streamlining operations.”

The “broad scope of regulation” is indeed one of the most significant compliance challenges that marketplace lenders face today, she said, with the risks of noncompliance growing as the volume of requirements and regulations does.

However, there is a range of other areas of noncompliance risk for these businesses.

Know Your Customer is another area of compliance friction for these companies, added Wales, as money laundering and terrorist financing become more significant threats to the borrowing and lending space.

Wales also emphasized the challenge of evolving reporting standards and the challenge that marketplace lenders must address as watchdogs elevate their reporting requirements, especially for global companies operating in multiple jurisdictions, each with its own set of standards for these digital companies to collect and submit data.

Which brought Wales to the final major challenge industry players face in the compliance realm: data management.

Risk management is critical to this space, but is another complex challenge for businesses operating within relatively new business models — and is one that demands complex risk calculations that rely on real-time decision making.

According to Wales, inefficient data management is among the tallest barriers to adequate risk management for industry players, with marketplace lenders often failing to expand the scope of their risk management strategies into industry-wide risk models. Data is critical to quickly assessing a particular loan’s strengths and weaknesses and is essential to the reporting and analytics process that can provide professionals with a visual representation of a loan’s performance.

Unfortunately, implementing the right tools and technologies to use data properly — whether it before regulatory reporting purposes, risk management or performance analysis — can be tricky for businesses in this space.

“The legal implications of data are perhaps one of the most understated challenges of regulatory compliance,” said Wales.

Data Solutions For Data Problems

In the private P2P and marketplace lending sector, as in many industries, data is often a crucial component of the compliance puzzle. However, data can also be essential for this sector as it works to understand and address developing, and frequently changing, regulatory requirements.

Supporting the aggregation and transmission of data for regulatory compliance is one part of this process. However, as Wales explained, benchmarking can also support the industry’s journey in developing best practices with regards to borrower protections, risk management and standards creation. Benchmarks related to loan type, contract terms, interest rates, value and volume are among the key metrics marketplace lenders must track, she said, allowing these companies to track their performance against themselves, rivals and against the industry as a whole.

Among CrowdBureau’s services is its ability to aggregate data from a range of sources to establish these benchmarks and support marketplace lenders’ compliance efforts. Application programming interfaces (APIs) are key to collecting publicly-available information, Wales noted, adding that the company is also looking to expand its collection of data that industry participants can provide voluntarily, and augment asset and risk management solutions she can promote transparency in this space.

However, while service providers can address top compliance and risk management challenges for marketplace lenders, these digital companies themselves would be wise to take proactive measures in managing performance and compliance risks.

“As the challenges around compliance continue to put pressure on firms, finding new solutions and methods will be vital,” said Wales.