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Harvard Case - Marketplace Lending at Funding Circle

"Marketplace Lending at Funding Circle" Harvard business case study is written by Sandra Sieber, Anna Rafnsdottir. It deals with the challenges in the field of Information Technology. The case study is 19 page(s) long and it was first published on : Dec 19, 2016

At Fern Fort University, we recommend Funding Circle to focus on strategic growth through a multi-pronged approach. This includes: 1) Expanding into new markets with a focus on emerging economies, 2) Developing innovative products and services leveraging technology and data analytics, 3) Strengthening its risk management framework to mitigate potential threats, and 4) Building a robust brand and reputation through effective marketing and customer relationship management.

2. Background

Funding Circle is a leading online marketplace lending platform that connects borrowers and investors. The company has experienced significant growth since its inception in 2010, expanding its operations to multiple countries. However, Funding Circle faces challenges in maintaining its competitive edge amidst increasing competition and evolving regulatory landscapes.

The case study focuses on Funding Circle's decision to expand into the United States market. The company faces several challenges, including navigating a new regulatory environment, building trust with investors, and establishing a strong brand presence.

3. Analysis of the Case Study

This case study can be analyzed using the Porter's Five Forces framework to understand the competitive landscape of the marketplace lending industry.

1. Threat of New Entrants: The threat of new entrants is high due to the low barriers to entry in the online lending market. This is evidenced by the emergence of numerous Fintech startups and established players entering the space.

2. Bargaining Power of Buyers: The bargaining power of buyers is moderate. Borrowers have multiple options for obtaining loans, but the need for credit and the convenience of online platforms provide Funding Circle with some leverage.

3. Bargaining Power of Suppliers: The bargaining power of suppliers (investors) is moderate. While investors have choices in the marketplace, Funding Circle's platform and reputation attract a large pool of investors.

4. Threat of Substitute Products: The threat of substitute products is high, with traditional banks and other financial institutions offering similar loan products. However, Funding Circle differentiates itself through its online platform, technology-driven approach, and focus on specific borrower segments.

5. Competitive Rivalry: Competitive rivalry is intense, with numerous players vying for market share. This includes both established players like LendingClub and Prosper, as well as newer entrants.

4. Recommendations

1. Strategic Expansion into Emerging Markets: Funding Circle should prioritize expanding into emerging markets with high growth potential and a burgeoning middle class. This requires careful market research and understanding local regulations and cultural nuances. This expansion can be facilitated through strategic partnerships with local financial institutions and leveraging technology to adapt to different market conditions.

2. Innovation in Products and Services: Funding Circle should invest in developing innovative products and services leveraging technology and data analytics. This could include:* AI-powered risk assessment: Utilize machine learning algorithms to improve risk assessment and loan approval processes.* Personalized lending solutions: Offer customized loan products based on individual borrower needs and credit profiles.* Alternative credit scoring models: Explore alternative data sources beyond traditional credit scores to evaluate borrowers.

3. Strengthening Risk Management Framework: Funding Circle needs to strengthen its risk management framework to mitigate potential threats. This includes:* Enhanced due diligence: Implement robust due diligence processes to assess borrower creditworthiness and mitigate fraud risks.* Diversification of loan portfolio: Spread investments across different loan types and borrower segments to reduce portfolio concentration risk.* Stress testing: Conduct regular stress tests to assess the resilience of the platform under adverse market conditions.

4. Building a Strong Brand and Reputation: Funding Circle should focus on building a strong brand and reputation through effective marketing and customer relationship management. This includes:* Targeted marketing campaigns: Utilize digital marketing channels to reach specific target audiences and build brand awareness.* Customer-centric approach: Provide excellent customer service and build strong relationships with both borrowers and investors.* Transparency and trust: Maintain transparency in operations and communication to foster trust and confidence in the platform.

5. Basis of Recommendations

These recommendations are based on the following considerations:

1. Core Competencies and Consistency with Mission: These recommendations align with Funding Circle's core competencies in technology, data analytics, and marketplace lending. They also support the company's mission of providing accessible and affordable financing options.

2. External Customers and Internal Clients: These recommendations address the needs of both external customers (borrowers and investors) and internal clients (employees). They aim to enhance the customer experience, improve operational efficiency, and create a more sustainable business model.

3. Competitors: These recommendations are designed to help Funding Circle stay ahead of the competition by differentiating itself through innovation, risk management, and brand building.

4. Attractiveness ' Quantitative Measures: While specific quantitative measures are not provided in the case study, these recommendations are expected to improve key performance indicators such as customer acquisition, loan origination volume, and profitability.

5. Assumptions: These recommendations are based on the assumption that the marketplace lending industry will continue to grow, and that Funding Circle can successfully navigate regulatory challenges and maintain its competitive edge.

6. Conclusion

Funding Circle has the potential to become a global leader in the marketplace lending industry. By focusing on strategic expansion, innovation, risk management, and brand building, the company can capitalize on the growth opportunities in the market and achieve sustainable success.

7. Discussion

Alternative Options:

  • Mergers and Acquisitions: Funding Circle could consider acquiring smaller competitors to expand its market share and gain access to new technologies or customer segments.
  • Focus on Niche Markets: The company could specialize in specific loan products or borrower segments to differentiate itself from competitors and build expertise in specific areas.

Risks and Key Assumptions:

  • Regulatory Uncertainty: The regulatory environment for marketplace lending is constantly evolving, posing potential risks to Funding Circle's operations.
  • Competition: Intense competition from both established players and new entrants could erode Funding Circle's market share and profitability.
  • Economic Downturn: An economic downturn could lead to increased loan defaults and reduced investor confidence, impacting Funding Circle's performance.

8. Next Steps

  • Conduct a detailed market analysis: Identify potential target markets for expansion, assess market size, and analyze competitive landscape.
  • Develop a detailed strategic plan: Outline specific goals, timelines, and resource allocation for implementing the recommended strategies.
  • Invest in technology and data analytics: Allocate resources to develop new products and services, enhance risk assessment capabilities, and improve operational efficiency.
  • Build a strong marketing and customer relationship management team: Recruit and train personnel to execute effective marketing campaigns and provide excellent customer service.

By taking these steps, Funding Circle can position itself for continued growth and success in the dynamic marketplace lending industry.

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Case Description

A wave of distrust in and disapproval of the traditional banking system surfaced following the financial crisis of 2008. Borrowers who, before the crisis, had had relatively easy access to funds were suddenly being cut off from credit lines as banks and other traditional financial institutions began restricting lending. This created a gap in financing that facilitated the growth and expansion of various forms of alternative financing, including online marketplace or peer-to-peer lending, which first emerged in 2005. The concept of marketplace lending is simple and has in fact been around for centuries. With the explosive growth of the Internet and online social networks, this business model has been digitally transformed and is being operated successfully via online platforms that match borrowers directly with investors that lend funds through such platforms.

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