LendingClub, Prosper, SoFi And OnDeck – Marketplace Lending Takeaways by David Schawel, Economic Musings
There’s been a flood of news over the last few weeks in the alternative lending space involving LendingClub, Prosper, SoFi, and OnDeck. What are the takeaways so far?
Lending is difficult: In a tweet last evening I said: All the boring things that “disruptors” take for granted in banking institutions (procedures, underwriting, compliance, etc) are now rearing their head. There’s valid reasons why FinTech has become popular since the financial crisis. The regulator burden at banks IS big and annoying, and regulations such as Dodd Frank, Volcker, and others HAS pushed risk outside the banking system. There’s a reason why banking is a regulated space and for the most part that’s a good thing. Have you talked to someone recently who went through a home mortgage refinance? It’s like pulling teeth, and much more difficult than getting a subprime auto loan for instance. But this is ok. Even if underwriting has swung from one extreme to another, it’s probably a good thing given what happened in ‘08. Having a solid culture of credit and compliance isn’t a cheap endeavor. Just look at how many people are on bank CCAR/stress test teams. While some people blame the recent events at LendingClub on “ethical” missteps, in reality I believe regulated financial entities are far less likely to have a culture and environment where something like this can happen. Now think, if the industry bellwether had this happen, do we think that this could be happening elsewhere?
Is it possible these lenders can only survive in a low rate / easy credit world? The answer is probably to be determined. That being said, there’s a whole host of reasons to be concerned. 1. We’ve seen the difficultly that these businesses have had with funding when the credit markets had hiccups in Q1. This is obvious but core deposit funded banks don’t have to access the ABS market or have bank lines in place to fund loans. A stable funding base that’s there regardless of the whims of the credit market is huge. Where do these lenders turn where credit tightens, and yield chase mentality isn’t the only thing on investors minds?
It won’t get better than this! In terms of credit quality and ability to tap the funding market, how can it get better than the last few years? So if these companies can’t make it work (very well) now, I think there’s reason to question their performance in a different part of the credit cycle.
Very little of this is really “disruption” at all. Focusing on the lending is great, but there’s a whole lot more that goes into making this work. While I am encouraged that technology folks are focused on the financial sector, and I’m hopeful that incremental improvements can be made, it appears that “disruption” will not be fast & furious. Instead, they will be forced to earn the trust of Wall Street investors who have not too distant scars from the financial crisis less than a decade ago.