Access to credit has always been crucial to achieve economic growth in the United States, a country where small businesses are responsible for two thirds of the new jobs created over the past twenty years. Today, advances in technology and availability of data allow online marketplace lenders to offer more efficient access to credit for small businesses and consumers, at historically low interest rates.
Originally connecting individual borrowers and lenders, online marketplaces are now structured networks that include partnerships with institutional investors and financial institutions, engaging in both direct lending and securitization transactions. On May 10, the US Department of Treasury published Opportunities and Challenges in Online Marketplace Lending, an overview of the market landscape that underlined the benefits and risks associated with online marketplace lending.
It appears that the majority of loans are used for refinancing purposes; Lending Club for instance notes that 68.5% of its borrowers report using loans to refinance existing debt or to pay off credit card debt. If this opportunity for consumers to benefit from lower interest rates is seen as a positive phenomenon, the Department of Treasury is also a strong advocate of an expanded access to credit to small businesses, micro-businesses and startups. Indeed, those job-creating companies rarely receive the full amounts requested when applying for a loan and often miss growth opportunities because of it.
This whitepaper identifies several areas of focus to foster sustainable growth and access to credit through the continued development of online marketplace lending.
- The use of data and modeling techniques in underwriting processes.
- The opportunity to expand access to credit for underserved markets.
- Untested business models and underwriting tools developed in a period of low interest rates and overall strong credit conditions.
- Enhanced safeguards needed for small business owners.
- Increased transparency to benefit borrowers and investors alike.
- Underdeveloped secondary market for loans.
- A need for regulatory clarity and harmonization.
Looking forward, the document also lists several trends that might impact the online marketplace sector. Amongst them, the US Treasury Department underlines the need for all stakeholders to use digitalized credit scoring processes carefully. Indeed, new variables and more complex algorithms will help expand access to credit and lower costs, but they also raise ethical questions regarding the treatment of the data collected, and have yet to prove themselves efficient in a less favorable credit environment.
Today, online marketplace lending seems bound to grow in the short-to-medium terms. However, recent setbacks experienced by prominent actors stress the importance for all not to sacrifice long-term sustainability and stability while shaping this promising sector.
The full report is available here; and any reader interested in a more detailed review can contact us at info[at]crowdvalley.com.
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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