Last week I had the pleasure of attending and speaking at the AltLend Summit - a gathering of people across financial services - in downtown Manhattan. Together, we were there to analyze and discuss the question posed by the conference: Is marketplace lending here to stay?
Skepticism toward this emerging form of lending has been building as the industry navigates through a particularly turbulent time. The surprise exit of the CEO of Lending Club, the largest online lender, raised questions about transparency for an industry that prides itself on it. And the company’s subsequent 35 percent drop in stock led some to wonder whether fintech’s downfall was here. Other events were troubling as well: OnDeck tumbled to more than 80 percent off its December 2014 IPO price; Prosper announced dramatic cuts in staffing and shut down its Salt Lake City office; and Avant saw 27 percent decline in loan volume in Q4 from the previous period.
While the above headlines are not great for the industry, I’m convinced that they are signs of an industry maturing. 2014 and 2015 brought an unhealthy amount of euphoria characterized by huge growth rates, hundreds of millions of dollars in venture capital, enormous valuations, high-flying IPOs, new lenders sprouting (almost) daily, and yield-hungry hedge funds chasing the newest, sexiest cash-producing asset.
Unfortunately, the euphoria came crashing down when the Q1 public markets were on the brink of collapse and the fickle hedge fund capital fled the space at an even faster pace. Lenders that were dependent upon this capital to fund their loans were left exposed in search for new sources of capital.
So, now what? Where do online lenders go from here? Will the industry be able to help the underserved consumer and small business owner? Here is how I see things unfolding.
1. Lending Club will survive.
The fall was great, but it is not a death knell. Having worked closely with the team at LendingClub, I am still shocked by all of the uncovered business practices. That being said, I believe that LendingClub will (slowly) regain the trust of investors, diversify their capital sources, and get back to helping consumers and small businesses across the country gain access to much-needed capital. Fortunately for LendingClub, they have plenty of cash to allow for them to be methodical in their approach and not cut corners.
2. There will be shake-out and consolidation.
As I mentioned above, 2014 and 2015 were years of incredible excitement in the industry that led to every Tom, Dick, and Harry starting a new lender. Unfortunately, many of those upstarts will soon run out of capital or will not have all the pieces of the puzzle in place to stay alive. The most successful lenders will be able to 1) acquire customers efficiently and cost-effectively, 2) underwrite prudently, 3) service the loans and have strong collections to reduce defaults and write-offs, and 4) leverage stable sources of long-term capital. As lenders continue to raise the bar, competition will expose weaknesses, forcing some to be rolled up or disappear -- while others will consolidate and thrive.
3. Banks will “play ball.”
Fintechs have essentially owned the online lending space, but banking behemoths are getting in on the action. Recently, big names like Wells Fargo and American Express have launched online, fast-decision loan products with a small-business focus. One way or another, we can expect to see more banks looking for a piece of the pie, and it will be interesting to see how Bank of America and others will respond.
4. (More) Regulation is coming — but how much is unclear.
As evidenced by the flurry of hearings, conferences, white papers, and proposed bills, both state and federal policymakers are beginning to hone in on the industry. Curbing regulation through best-practices that will benefit the borrower and leveraging tools to provide clear and understandable terms are key topics that will continue in industry circles. Where exactly the hammer will fall in fintech remains to be seen at this point.
5. Online lending is here to stay.
Every industry has its bumps, and in the case of marketplace lending, some of this is much-needed growing pains. However, small business lending provides the fuel for small businesses across the country, and the fundamentals are still in place for this to be a formidable industry.
I am confident the supply of capital will continue to come from online lenders using technology to minimize risk and streamline processes. While it may have seemed bleak for a moment, the industry is maturing and the future for online lending remains bright.
