I recently
had the opportunity to attend the Marketplace Lending & Investment
Conference in New York City. I came away from this conference
believing this emerging market sector has tremendous potential and conveys a
lot of promise, but it is still a good distance away from delivering
on that promise. On loan volume alone, it is a mere thimble in size when
compared to the lending volume associated with traditional lending
markets. That may explain why it was stated by one moderator during the
conference: “the majority of marketplace lenders are not yet profitable” – a somewhat
surprising comment given the financial benefits associated with Marketplace
lenders use of the online digital channel, typical higher non-prime lending
rates, and the operational efficiency advantages they generally gain with using
Fintech Technology. No doubt, this emerging market has a lot of growing
pains and challenges to tackle, but one cannot help but be enamored with all of
its potential. That potential probably explains why there is so much
interest and talk about it within the credit and ARM industries.
Marketplace Lending is generally described as
non-traditional lenders that leverage Fintech capabilities to engage in
offering non-prime loans to consumer via on-line. Their main source of
funding has come primarily from private investors and private equity
firms, which has been key in terms of enabling them to quickly come to
market. However, unless these private investment sources are extremely
large, the capital funding can quickly dry up. As such, the Marketplace
Lending Conference was really about two concerns: 1) obtaining more capital for
loan growth, and 2) looming regulatory / compliance changes. Both of
which are the main challenges to real growth in this market sector.
I learned at this conference that while it was generally
believed that online lenders armed with Fintech technology pose a serious
threat to banks, and credit unions, this is not necessarily the case. The
threat, while certainly real, should not be considered an immediate
concern. The reason being, as previously stated, marketplace lenders have
the challenge of not being able to drive to the next level of loan growth due
to not having easy access to more lending capital. Banks and credit
unions, as a whole, do not have this same challenge or at least not to same
degree. Traditional lenders have a mature financial eco-system in
place to more easily obtain capital, as well as handle the multitude
of activities throughout the entire credit process – from various
funding options, all the way through to collections, recovery and debt
sales. This gives those banks and credit unions a big leg up on
marketplace lenders, who are still attempting to develop out their own
financial eco-system. Furthermore, instead of competing with marketplace
lenders, many banks and credit unions have been quietly investing in and or
acquiring loans from marketplace lenders as a means to drive up their own loan
volume through an alternative channel.
With respect to developing eco-systems and platforms, the marketplace lending
sector has not yet invested a lot of time and attention on the management of
delinquent accounts or bad debt. This is due, in part, to being more
focused on lending activities such as marketing, ramping up loan application
volume, and refining their customer onboarding process. Also, for many of
the marketplace lenders, the number of delinquent accounts is relatively small
at this point in their portfolio growth and is not having a sufficient enough
impact on financial performance to warrant shifting more attention, expenses
and development to their backend operations. As such, the majority of
marketplace lenders currently elect to outsource collections efforts.
These marketplace lenders will either outsource the entire collections and
recovery effort, or do so for delinquent accounts that reach later stages of
collections, typically at sixty days past due or greater. Generally
speaking, these marketplace lenders typically only employ one or two outsource
partners. Therefore, agency management activities and related tools are not
necessarily complex or sophisticated.
As I left the conference, I walked away thinking that in the
not too distant future the Marketplace Lending Industry and the ARM Industry
have the potential to become the perfect partners. Marketplace lenders
will soon start to shift more of their attention to portfolio management and
collections as it rises in relative importance towards the continued success of
their business (along with more origination volume, and more sources of
capital). However, these lenders all are not about building out
large, costly, and difficult to manage infrastructures, or having lots of
personnel performing manual tasks. This is true especially with
regard to collections, recovery and debt sales. The marketplace
lenders would much rather engage in a truly strategic and close
partnership with a collection agency to leverage their expertise and
established collection services. In particular, these lenders are
interested in working with those agencies that have invested in modern
collections platforms with the latest functionality, along with streamlined
processes, and strong compliance capabilities Most importantly,
the lenders are looking for partners whose collections culture aligns with
those of marketplace lenders (focus on customer care / customer
service).
