Can Marketplace Lending Go the Distance? An Insider’s View Part I

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Susan Joseph is a former General Counsel of a start-up peer lending financial services/tech disrupter. She served as General Counsel at a trade receivables insurer and as Senior Counsel provided end to end credit guidance within the technology distribution global supply chain.

I spoke to her recently to get her views on some of the recent news around Peer to Peer and Marketplace lending platforms.

DG: This past year has been a banner year for anyone with a Peer to Peer lending platform. What do you make of all of this? Would you be an investor in Lending Club? OnDeck?

SJ: It has been a banner year and the successful Lending Club and OnDeck IPOs are public validation that this asset class is to be taken seriously. This market is active. SoFi expects to file an IPO next year. There are strong private players such as Prosper and Funding Circle who have scaled and are rapidly growing. Prosper alone has originated over 2 billion dollars in consumer loans and Funding Circle originates B2B loans in both the UK and the USA, so it plays in multiple markets.

At the 30,000 foot level, I think P2P, now called Marketplace Lending, is the first of the bank disintermediated asset classes to grab everyone’s attention. The door is wide open for other non-bank Fintech and supply chain players to join in and create other assets.

It’s worth remembering that the altfi industry developed to fill the post-2008 consumer and business need for smaller and mid-sized loans when the banks exited that market. Other opportunities exist and will increase as the regulatory environment and capital requirements surrounding banks continue to tighten.

I do think it’s a great time to be an investor, and by investor I mean a purchaser of a loan or security from a lending platform. As far as who I’d invest in, it always comes down to whether the underlying borrower can pay back the loan. I’d evaluate the platform on how well I think it can underwrite, service and collect the borrower payments.

DG: Do you believe these platforms can combine speed around risk assessment and due diligence and can stand the test of time?

SJ: I think many of them can. The underwriting risk is handled by a sophisticated algorithm propelled by the platform’s Big Data, and answers to whether you credit qualify are generated quickly. So that part of the diligence can stand the test of time. But, that only takes you so far. At some point a platform will add more risky borrowers to sustain its growth rate, and then servicing and collections will make or break how well they do, particularly when we enter into an economic downturn. You can automate a lot of that and prevent some risk by combining speed with that automation, but there is a strong human element and psychology involved in lending and collections, and the platforms who embrace that in addition to algorithms and speed will be the winners.

DG: Where do you see differences in their business models that are noteworthy?

SJ: Key factors I’d look at are: Does the platform lend to consumers or businesses? Platforms tend to specialize in one or the other, and the regulatory frameworks are different for each. Does the platform sell whole loans or notes (securities)? These vehicles differ from a risk and regulatory perspective. There are many other factors. Does the platform hold the loans keeping skin in the game and then securitize them or does it act simply as a pass through? What data does the API funnel to the investor? Is there strong human attention to customers amidst all the technology?

Tomorrow, we will look at customer acquisition costs, investor issues, and why it’s all “about the API” for these platforms.

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