2016, a look in the rearview mirror
In mid-2016, the marketplace lending sector experienced some turmoil leading to increased scrutiny from regulators and institutional investors’ concerns about the securitization process and the quality of the underlying loans. However, this slowdown was temporary and personal marketplace loans globally grew by 210% (+64% for small business marketplace loans).
In mid-2016, the marketplace lending sector experienced some turmoil leading to increased scrutiny from regulators and institutional investors’ concerns about the securitization process and the quality of the underlying loans. However, this slowdown was temporary and personal marketplace loans globally grew by 210% (+64% for small business marketplace loans).
Even the actors that were hit the hardest were able to bounce back by the end of the year: despite the forced resignation of Lending Club’s CEO, the firm was able to complete its first rated securitization of consumer loans in December 2016 for more than $100M.
At the same time marketplace lenders are maturing, and their track-record is becoming impressive enough to attract investors that were previously reluctant to enter the market (often due to concerns regarding the potential impact of borrowers’ default). Indeed, marketplace lenders are not covered by the FDIC (or its equivalents) and investors could end up losing all or part of their original investment. Nevertheless, it appears that net returns (including defaults) range between 4.5% and 6.5% across the main platforms, and over the whole lifetime of the industry.
Another factor has been driving the growth of the marketplace lending sector: its lack of correlation with traditional asset classes such as stocks and bonds. Indeed, the uncertainty associated with upcoming political and economical evolutions in mature markets (new regulations in the US, elections in France and Germany, negotiation of the Brexit, etc.) investors are looking to invest more heavily in sectors less dependent on systemic changes. Given the global context, we can expect marketplace lending’ to become a viable alternative to investors around the world as they are able to easily diversify their loans portfolios, and collect interests regardless of markets’ volatility.
2017, what to expect
Several trends are to be watched for the year to come, some that were already driving the marketplace lending sector in 2017, and others that emerged more recently:
- Partnerships: by nature, banks and fintech companies have different advantages: the formers having an easier access to equity easily and an existing customer base, while the latters provide cutting-edge technologies and a more customer-centric approach. By joining forces, they are able to better address their customers’ needs and to enter new markets. The partnership between JPMorgan and On Deck is emblematic of this type of strategic partnership and services providers are also teaming up to tailor their offers for the marketplace lending industry. Experian (world leader in information services) and dv01 (reporting and analytics platform), for instance partnered in January to provide a complementary solution, tailored to the needs of the market.
- Technology: the perpetual technical innovations that power the growth of the fintech ecosystem are often behind the success of the marketplace lending sector. And practical applications sometimes seem endless. A good illustration would be the creation of Lending Robot, a fully automated hedge-fund that invests in P2P lending platforms via a proprietary ‘robo-advisor’, constantly refining its strategies with the help of Blockchain-based machine learning algorithms.
- Diversification and consolidation: if most marketplace lending platforms originally specialized in a single niche, they tend to develop their offerings by entering new lines of business, as they grow. For instance SoFi, that used to focus on student loans now offer mortgages and consumer loans; and Lending Club that used to offer only consumer loans enter the auto loans market. By doing so, they are reducing the smaller players’ market shares and naturally driving the consolidation of the industry.
- US regulatory reforms: even if the new administration’s upcoming changes to the regulatory requirements have yet to be fully disclosed, its desire to renew the American “entrepreneurial spirit” through the dismantlement of the Dodd-Frank Act (that is seen as a barrier for small businesses’ access to credit) might translate into more flexible regulations for marketplace lenders. In order to weight on the matter, competitors are joining forces to lobby in favor of a less regulated market. The Marketplace Lending Association for instance recently welcomed 11 new members in an attempt to “advance [their] mutual public goals both in Washington and in state capitols around the country," according to Nathaniel Hoopes, executive director of the MLA.
Crowd Valley’s framework is used worldwide by both upstart and incumbent lenders, and our team has years of expertise in the field. Any interested party shouldn’t hesitate to get in touch.
At the same time marketplace lenders are maturing, and their track-record is becoming impressive enough to attract investors that were previously reluctant to enter the market (often due to concerns regarding the potential impact of borrowers’ default). Indeed, marketplace lenders are not covered by the FDIC (or its equivalents) and investors could end up losing all or part of their original investment. Nevertheless, it appears that net returns (including defaults) range between 4.5% and 6.5% across the main platforms, and over the whole lifetime of the industry.
Another factor has been driving the growth of the marketplace lending sector: its lack of correlation with traditional asset classes such as stocks and bonds. Indeed, the uncertainty associated with upcoming political and economical evolutions in mature markets (new regulations in the US, elections in France and Germany, negotiation of the Brexit, etc.) investors are looking to invest more heavily in sectors less dependent on systemic changes. Given the global context, we can expect marketplace lending’ to become a viable alternative to investors around the world as they are able to easily diversify their loans portfolios, and collect interests regardless of markets’ volatility.
2017, what to expect
Several trends are to be watched for the year to come, some that were already driving the marketplace lending sector in 2017, and others that emerged more recently:
- Partnerships: by nature, banks and fintech companies have different advantages: the formers having an easier access to equity easily and an existing customer base, while the latters provide cutting-edge technologies and a more customer-centric approach. By joining forces, they are able to better address their customers’ needs and to enter new markets. The partnership between JPMorgan and On Deck is emblematic of this type of strategic partnership and services providers are also teaming up to tailor their offers for the marketplace lending industry. Experian (world leader in information services) and dv01 (reporting and analytics platform), for instance partnered in January to provide a complementary solution, tailored to the needs of the market.
- Technology: the perpetual technical innovations that power the growth of the fintech ecosystem are often behind the success of the marketplace lending sector. And practical applications sometimes seem endless. A good illustration would be the creation of Lending Robot, a fully automated hedge-fund that invests in P2P lending platforms via a proprietary ‘robo-advisor’, constantly refining its strategies with the help of Blockchain-based machine learning algorithms.
- Diversification and consolidation: if most marketplace lending platforms originally specialized in a single niche, they tend to develop their offerings by entering new lines of business, as they grow. For instance SoFi, that used to focus on student loans now offer mortgages and consumer loans; and Lending Club that used to offer only consumer loans enter the auto loans market. By doing so, they are reducing the smaller players’ market shares and naturally driving the consolidation of the industry.
- US regulatory reforms: even if the new administration’s upcoming changes to the regulatory requirements have yet to be fully disclosed, its desire to renew the American “entrepreneurial spirit” through the dismantlement of the Dodd-Frank Act (that is seen as a barrier for small businesses’ access to credit) might translate into more flexible regulations for marketplace lenders. In order to weight on the matter, competitors are joining forces to lobby in favor of a less regulated market. The Marketplace Lending Association for instance recently welcomed 11 new members in an attempt to “advance [their] mutual public goals both in Washington and in state capitols around the country," according to Nathaniel Hoopes, executive director of the MLA.
Crowd Valley’s framework is used worldwide by both upstart and incumbent lenders, and our team has years of expertise in the field. Any interested party shouldn’t hesitate to get in touch.
About the author - Enzo Ramos
Born and raised in France, Enzo began working within Fintech in 2014, covering the regulatory changes than enabled the creation of French equity crowdfunding platforms for Lyon Place Financière, an association that regroups all actors of Auvergne-Rhône-Alpes’ financial place. There, he also worked on an exhaustive analysis of the regional stock market among other duties. Enzo has lived and studied in different countries, including the United States (Philadelphia & Monroe,MI) and France (Paris & Lyon).
Born and raised in France, Enzo began working within Fintech in 2014, covering the regulatory changes than enabled the creation of French equity crowdfunding platforms for Lyon Place Financière, an association that regroups all actors of Auvergne-Rhône-Alpes’ financial place. There, he also worked on an exhaustive analysis of the regional stock market among other duties. Enzo has lived and studied in different countries, including the United States (Philadelphia & Monroe,MI) and France (Paris & Lyon).
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