Can better products and lending practices heal marketplace lending’s hangover?

The tide is waning for marketplace lending. As Warren Buffet once said, we are now about to see who has been swimming naked.  However, contrary to panicked media reports, the industry is not in danger. It is just dealing with a hangover. Marketplace lenders experienced incredible growth since 2010, with annual origination volumes on Lending Club and Prosper – the 2 largest marketplace lenders -- rising from $153 million in 2010 to over $12 billion in 2015. In 2016, the trend reversed. For Lending Club, total originations for Q2 2016 came in at $1.96 billion, down from a peak of $2.75 billion in Q1. In 2Q15, Prosper reported a steep decline of over 50% in originations compared to same period a year before. Marketplace lenders are trying to explain the change. “The decreases above are the result of a number of our largest investors that have paused or significantly reduced their purchases of whole loans through Prosper’s marketplace,” the company stated in its recent quarterly report. It promised to take steps to increase available capital by increasing the interest rates on loans, launching a new line of asset management products and improving the retail investor experience. The hype can be clearly seen in PwC’s DeNovo quarterly report, which tracks fintech trends. Marketplace lending was the top trend for the first three quarters in 2015, but dropped to the second-largest trend in 4Q15. In 1Q16, the industry did not even make the top 10. “Back in late 2015 everyone was getting into the space, and there was too much optimism” said James Wu, founder and CEO of Monja, a marketplace lending analytics company. Now, he adds, smarter investors are looking at data more carefully and can generate better returns. “From our own analysis, we see some of the returns for platforms are better than they have been in the last 24 months. 2015 was a great year for platforms, but from an investment perspective, the returns were low.” According to Wu, an excess of funding in 2015 caused marketplace lenders to desperately look to expand their borrower base, venturing into lower tiers of credit, pushed by aggressive marketing techniques like direct mailing. The repercussions of such action are now visible with a rise in delinquencies and a damning report from Moody’s questioning the viability of the asset class. “Investor overreacted to that news,” said Wu, adding that the 2015 vintages are hurting current performance, overshadowing newer and better vintages that will generate long term growth and returns for investors. Though each platform comes with a built in set of analytics tools that allow investors to select loans according to their risk appetite, third party analytics companies, such as Monja or Orchard, can give investors the ability to work across multiple platforms and provide deeper insight into the sources of excess returns. Such strategies are of course harder than dumping money into all platforms as some investors did a year ago. Unlike other sources of capital, securitizations of marketplace loans are trending upwards, topping $1.7 billion according to PeerIQ, and will probably become a more substantial source of capital for marketplace lenders. This, however, is a far cry from marketplace lending's P2P origins. Marketplace lenders are at a crossroads. The resulting shakeout, however, might prove to be beneficial to the market. “Investors are getting more realistic about returns, and platforms are getting more realistic about what they can get away with. They need to come back and offer products that are compelling for investors,” Wu concluded.