Marketplace Lending Growth Hinges on Data and Analytics Capabilities

By Richard Kelly,   NewOak Managing Director, CrowdFundBeat Guest post

Last week, the Structured Finance Industry Group presented a panel discussion on marketplace lending in New York. The panel included representatives of marketplace platforms (including Lending Club, the market leader), an institutional purchaser (a fund), a rating agency and a lawyer specializing in the area. Here are a few key takeaways:

 

unnamed (1)

1. The sector is growing, both in loan volume and the number of new platforms, but:

      a. this growth has put pressure on both rates and underwriting standards
    b. proliferation of platforms will lead to shake-out and consolidation

2. The basic product remains the three- to five-year unsecured loan. Small-business loans and other sectors are growing, but more slowly.

3. Emphasis is on financial technology to automate the underwriting. Both platforms (which use automated processes to generate data on potential borrowers) and purchasers (who develop proprietary algorithms to identify “good” borrowers whose loans are perceived as underpriced) rely on big data capabilities to mitigate risk.

4. For platforms, the originate-to-sell model is still dominant. However, some are moving in the direction of being balance-sheet lenders who hold their own loans.

5. Although there have been and will continue to be securitizations, the dominant players are still buy-hold yield-seeking funds. Retail (the original “peer-to-peer” model) is of diminishing importance.

6. Strong preference at Lending Club and other established players for borrowers coming through origination channels (vs. “walk-ups”). Alliances with other vendors (e.g., solar panel vendors, etc.) are a big focus.

7. There is warehouse capacity and appetite: banks want to provide warehousing to fund buyers of this product.

8. On the ratings front, the focus is on:

      a. robustness and transparency of the process at the platform level
    b. servicing considerations (not yet tested in an economic downturn)

9. The Madden decision and associated usury risk is causing purchasers to exclude loans that have this risk. Loans from New York, Connecticut or Vermont that have interest rates in excess of the applicable usury rates in those states are being rejected by purchasers and excluded from securitization pools.

Overall, it appears likely that continued growth of marketplace lending platforms will hinge on the kind of data-handling capabilities needed to expand both the availability of individual credit and increase the efficiency of pricing. However, in doing so the platforms are pushing an entire sector of credit into a less heavily regulated environment (since Dodd-Frank there is no such thing as an unregulated environment involving credit) with an interesting mix of incentives that resembles the mortgage lending environment of the early 2000’s. That said, there are several notable differences:

  • There is no asset bubble to drive “irrational exuberance”
  • These are very short duration assets so problems (and there will be problems) will surface much more quickly
  • The size of the market is a small fraction of the size of the mortgage market – thus “systemic risk” is much less likely to be a factor

Successful platforms will be those that can bring together technological capabilities, analytic rigor and deep understanding of risk and credit.

Tags: , , , , , , , , , , , , ,

HEADLINE NEWS

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

NPRAfter Outcry, Crowdfunding Site Patreon Backs Off Plan To Raise FeesNPRThe popular crowdfunding service Patreon has backed off plans to change its payment structure, after widespread, vocal and passionate opposition from creators and their fans. Last week, the site announced it wou [...]

CoinDeskKickstarter ICO? Don't Count On It Says Crowdfunding Leader ...CoinDeskThe company most widely associated with crowdfunding, Brooklyn-based Kickstarter, has no plans to get into the initial coin offering (ICO) business. Coming in response to the news yesterday that compet [...]

TechCrunchHow hate speech crowdfunding outfit Hatreon crept back online ...TechCrunchIf you want to make a living creating white supremacist content, you're probably not going to do it via sites like Kickstarter and Patreon, which prohibit hate speech. Fortunately there's Ha [...]

Bitcoin News (press release)Crowdfunding Giant Indiegogo Joins the ICO BandwagonBitcoin News (press release)Crowdfunding Giant Indiegogo Joins the ICO Bandwagon Indiegogo is a popular crowdfunding platform headquartered in San Francisco that was founded in 2008 by Eric Schell, Slava R [...]

HuffPostIs Crowdfunding Really a Good Idea for Innovation?HuffPostHere's a head-scratcher for you: according to new research, if you refer to your product or idea as both “novel” and “useful” in your crowdfunding campaign, your funding will be lower than it would if you just decl [...]

Coindesk (press release) (blog)Crowdfunding Giant Indiegogo Opens to ICOs - CoinDeskCoindesk (press release) (blog)The startup revealed today that, through an existing partnership with MicroVentures, it will begin offering services to projects seek to use the blockchain funding model. [...]

FortuneWant to Hold Your Own ICO? Indiegogo Can Help You With ThatFortuneCrowdfunding sites like Kickstarter (kickstarter, +0.00%) and Indiegogo raised start-up cash for a generation of online entrepreneurs, but one increasingly visible method of internet-sourced financing seemed to h [...]

ForbesCrowdfunding Do's And Dont's From iFundWomen's Karen CahnForbesDuring our conversation, she was transparent in sharing that her first software company, VProud, failed because she “did everything backwards” and spent too much time trying to perfect the product. “Pe [...]

TechCrunchFormer Gawker employees are crowdfunding an effort to buy Gawker.comTechCrunchWhile Univision acquired most of Gawker Media's sites last year (and renamed them as the Gizmodo Media Group), the deal didn't include Gawker itself. In fact, BuzzFeed reported last month [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |