Marketplace Lending in 2015: From the Margins to the Mainstream
Some have likened it to the California Gold Rush. Others have said it’s poised to completely disrupt the centuries-old banking industry as we know it.
No matter how it’s described, marketplace lending is a force to be reckoned with in finance. On the heels of the December 2014 IPOs of industry-leading platforms Lending Club and OnDeck, 2015 has been the year that the marketplace lending industry has truly come into its own — and gone from the margins to the mainstream.
There are five key signals that demonstrate the evolution of marketplace lending over the past year, all of which speak to its growing influence among traditional financial firms, investors, government and consumers:
1. Traditional players join the game.
In 2015, we have seen previously-unlikely partnerships and collaborations begin to form among traditional financial firms and marketplace lenders.
- In January, Funding Circle and RBS partnered to give thousands of small businesses greater access to finance.
- In February, CommonBond announced a partnership with Nelnet, in which Nelnet agreed to finance $150 million of CommonBond’s annual loan volume.
- And then in April, Lending Club and Citigroup announced a partnership in which Citi would use Lending Club’s platform to supply up to $150 million to borrowers and communities.
And those are just the partnerships. In June, Goldman Sachs — one of the country’s oldest and largest banks — announced plans to launch an online consumer lending unit. This move by a 146-year-old Wall Street giant is one that further validates the fast-growing marketplace lending industry.
That’s on the operating side. On the advising side, we’ve seen a wave of new industry reports from top advisory firms espousing the potential of emerging financial players to disrupt finance. Goldman Sachs released their “Future of Finance” report in March. Morgan Stanley released a similar report in May, and McKinsey released one in September. All carried a similar message: traditional finance faces growing competition from fintech startups, and it’s time to pay attention.
Jamie Dimon also got into the mix. In April, the JP Morgan CEO alerted shareholders to the fact that “Silicon Valley is coming” — referring to the onslaught of tech-enabled fintech companies that are solving problems across the finance value chain.
All in all, we’ll likely see continued partnership between traditional and emerging finance, so long as both sides bring something to the table. To date, traditional finance has brought low-cost financing to the table (the “financial back-end”), while emerging finance has brought strong consumer products and positive user experience (the “financial front-end”).
There is continued potential for each side to take the best of both worlds and make finance better for the end consumer.
2. Big ratings from the Big Three validate marketplace lending.
A further sign of marketplace lending’s rise is the growing use of capital markets, namely securitization. Just this year, we have seen an increasing number of securitizations issued among marketplace lenders.
In January, Prosper Marketplace received a credit rating from Moody’s for a $327 million securitization deal put together by BlackRock. Six months later in July, Citigroup announced it would sell $377 million in loans originated through Prosper, with Moody’s assigning a grade of A3 to the highest-rated class of notes.
Those securitizations have held marketplace lender loan assets and have been issued by an investor sponsor, such as BlackRock or Citi. Some marketplace lenders have gone even further and issued securitizations themselves, which means not only do their loan assets have to pass rating agency and investor muster, but so, too, do they as companies and platforms.
A significant industry-first took place in June, when CommonBond completed its first securitization of student loans, securing investment-grade ratings from Moody’s and DBRS. The $100 million transaction marked the first time that a Big Three rating agency issued an investment-grade rating for a first-time issuer in marketplace lending. That same month, SoFi closed the largest securitization to date for a marketplace lender — with investment-grade ratings as well.
The pace and frequency of marketplace lending securitizations — especially those that carry investment-grade ratings — have increased significantly throughout the year, and it is a trend that will likely continue next year and beyond.
3. Washington, D.C. wants to learn more.
Throughout 2015, we have seen greater engagement from the U.S. government in an effort to better understand the marketplace lending industry.
This past spring, the White House invited us to discuss fintech and marketplace lending. We talked about specific ways in which the government could support innovation in finance. It was a fruitful discussion that continues today.
The CFPB is also engaged. This year, they have published a strong consumer centric report on student loan refinancing servicing. And they are increasingly interested in marketplace lending more broadly as well. In fact, there’s an effort to get more marketplace lenders signed onto the CFPB customer complaint database, as the platforms rise in prominence and reach more and more consumers.
Over the summer, the U.S. Department of Treasury engaged with the industry through a request for information on marketplace lending, asking the community of marketplace lenders, borrowers and investors what the federal government could do to improve conditions for and foster innovation in the industry. When the comment period ended, more than 100 responses had been posted by platforms (including CommonBond), service providers and consumers.
Many in marketplace lending view the Treasury’s RFI as an effort for the government to understand how marketplace lenders serve consumers better and determine how to most effectively apply these tenets to broader finance. There is also a possibility that this initiative could lead to the introduction of new rules and regulations for marketplace lending — yet another sign of a maturing industry.
4. An ecosystem of marketplace lending service providers is enabling further growth.
You know an industry is truly transitioning from the margins to the mainstream when an entire ecosystem of service providers to that industry is experiencing substantial growth.
We’ve seen this take shape in marketplace lending with the success of companies such as Orchard, which builds software that helps investors analyze data and purchase loans; First Associates, which has become a well-known consumer loan servicing firms; and Loftopia, a marketing services firm that helps marketplace lenders acquire and convert customers.
The marketplace lending industry has reached a point where it can support and sustain companies that exist to serve it.
5. Not all marketplace lenders are created equal.
In recent months, a growing part of the conversation around marketplace lending has focused on the Madden v. Midland Funding, LLC case. The legal implication of the case is such that if a marketplace lender (a) uses a third party originating back and (b) charges interest rates higher than state usury laws, then the marketplace lender might find it difficult to sell the loans to investors because of possible “true lender” implications.
With Madden v. Midland, we are starting to see a “tale of two cities” emerge within marketplace lending, showing that not all marketplace lenders are created equal, as the case does not affect all platforms to the same extent. For instance, if a platform charges interest rates that are lower than state usury laws, then there is no issue. Or if a platform lends to consumers directly, then there is no issue.
Ten months in, and 2015 has already proven to be a meaningful year for marketplace lending as it has gone from the margins to the mainstream. In 2016, I expect the industry to mature further such that marketplace lending cements itself as a vital part of the financial system. More of your family and friends will have taken out a loan with a marketplace lender or invested on one — or both.
This post originally appeared on CommonBond’s blog.
David Klein is CEO and Co-Founder of CommonBond, a values-driven fintech company that is reimagining the student loan experience. The company refinances and consolidates student loans to provide a better experience through lower interest rates, personal customer service, a simple application process and a strong commitment to social good. CommonBond borrowers save over $14,000, on average, over the life of the loan by refinancing.
