Marketplace Lending 2.0: Weathering the Storm
“This is the peak,” one financial technology veteran said as 3,500 people gathered recently near our San Francisco offices for LendIt, the biggest online lending conference. “Next year there will be half as many people around.”
A shakeout is under way for marketplace lending after five breakneck years in which loan originations from major players rose 700%, according to a study by California’s Department of Business Oversight. In response, the agency has launched an inquiry into the industry’s compliance with state laws.
Scrutiny from regulators, including the Consumer Financial Protection Bureau, is one of many growing pains as the upstart industry matures. That new reality lent a subdued air to this year’s LendIt, a contrast to the unbridled bullishness that prevailed at the conference last year.
Economic worries and increasing loan losses at some companies have sent stock prices for publicly held fintech companies tumbling. Investors who once battled to buy stakes in marketplace companies or lend them money for expansion have pulled back, leaving many young start-ups struggling to fund their next stage of growth.
The result has produced what one LendIt speaker called “the trough of the hype phase,” with more and more online lenders looking for partners to survive. Often, though, potential buyers are turning up their noses at sellers’ asking prices.
Amid the anxiety, we here at Insikt were heartened by a keynote speech from fintech serial investor Peter Thiel, who discussed lessons he has learned since founding PayPal in 1999 about what it takes to survive. If he’s right, we think we’re well on track.
It’s best to avoid companies that wrap themselves in the latest jargon and hook their fortunes to megatrends, Thiel said. Sample danger alert: “Mobile big data company using the cloud to deliver SaaS to emerging educational platforms.”
The formula for success is not to shoot for a small piece of a large trend, Thiel said: “You don’t want to be a minnow in a large ocean.” He outlined a different approach for marketplace lenders, one which can create a “moat” around their business models, a protective barrier from competition by would-be rivals.
Thiel prefers companies with distinct, hard-to-copy niches, firms that use specialized technology to create and dominate a narrow new market, as PayPal did by using email to make payments.
Sound challenging enough? Now add in another crucial factor: a business model that allows the company, once established, to grow a customer base exponentially, without running out of money, until the major returns on investment come rolling in — perhaps after a decade.
Here at Insikt, our Lending as a Service (LaaS) model and partnerships with retailers, banks and other businesses are designed to help us accomplish those short- and long-term goals.
Our proprietary credit scoring incorporates valuable data from our partners about their customers and gives us an edge by letting us making loans that outperform traditional methods, particularly to borrowers that are historically hard-to-underwrite. We make it easy for our partners’ customers to apply for general-purpose loans in retail locations by answering an eHarmony-like questionnaire on tablets that we supply.
And our costs of acquiring new customers are minimized because they are recruited by employees on the payrolls of our partners. The partners provide the marketing and label the loans with their own brands while we supply the technology to process loan applications, make scoring decisions, fund and securitize loans with money from our investors, and collect payments that we split with the partners.
Then there is the looming issue of regulation — something that, as Thiel noted, has caused “almost an allergic reaction” among Silicon Valley entrepreneurs and investors. But rather than avoid this “specter” at all costs, Thiel suggested that companies in certain regulated niche businesses may wind up digging deeper protective moats by learning early on how to coexist with government agencies overseeing their operations.
“If you get through some of the hoops, this can be a fairly decisive advantage,” he said.
Consumer lending is, of course, one of those niches, and the shifting tides of state and federal regulation are something that many of us at Insikt have navigated successfully for years. Dealing with lending rules has always been part of what we do, so it’s an advantage as well as a burden.
The biggest new waves to roil our market are from the Consumer Financial Protection Bureau’s upcoming rule requiring payday and small installment lenders to thoroughly evaluate whether borrowers can afford these loans.
Here at Insikt, we’ve incorporated these “ability-to-repay” reviews in our underwriting process since day one. We are happy that many of our tried-and-true practices, such as notifying borrowers via text messages before making electronic withdrawals from their bank accounts, will now be required of all lenders. We believe these rules create a level playing field and protect borrowers from predatory debt traps.
Some have predicted that the new rules will be the end of payday lending in America and will leave low- to moderate-income families with few credit options. We believe our Lending as a Service model and partnerships create a tremendous opportunity to fill this void by enabling families to borrow responsibly — a step toward achieving their long-term dreams.
To discuss Insikt’s business in greater detail, and why we think our company is built for long-term success, contact me at email@example.com
Brian Zalaznick — Head of Asset Management, Insikt, firstname.lastname@example.org