Moody’s offered a harsh analysis of the current viability of marketplace lenders. In a report published October 19, the ratings company said that the competitive advantages of online lending are predicated on an unsteady foundation of confidence-sensitive funding, low recurring revenue, and high marketing budgets.
“Online lenders have yet to achieve adequate profitability, and rapid growth exacerbates the volatility of their performance,” Warren Kornfeld, a Moody’s senior vice president said.
According to the report, many of the online lenders have a high proportion of non-recurring, gain-on-sale or fee income generated from selling newly-originated loans.
Marketplace lenders in the US accounted for loan originations worth approximately $23 billion in 2015, according to Deloitte. LendingClub, the largest marketplace lender in the US, originated $8.4 billion of loans in 2015.
Lending Club has been under fire this year when then-CEO Renaud Laplanche was found to be in possession of undisclosed pools of capital to fund loans on his firm’s platform. The scandal was seen to be indicative of the capital crunch marketplace lenders are facing. They’re having a harder time attracting money from hedge funds and are continually looking for new capital sources through securitizing loans or investments from marketplace lending-focused mutual funds.
On the borrower side as well, marketplace lenders are having a tough time. In a recent SEC filing, Lending Club stated it “continued to observe higher delinquencies in populations characterized by high indebtedness, an increased propensity to accumulate debt, and lower credit scores.” The lender states the trends are more notable in higher risk grades, which account for approximately 12 percent of platform volume. In response, Lending Club increased interest rates and tightened credit policies.
Marketplace lender CircleBack also announced this week that it will stop making new loans.
Increased delinquencies and defaults might dissuade banks from buying up the loans or discourage retail investors from using the platform.
Moody’s notes that some online lenders have spent as much as 55 percent of revenue on sales and marketing, with payoff still uncertain.
Ironically, incumbents might beat the disruptors at their own game. Not impaired by funding constraints, banks can offer user friendly, online loan origination. Goldman Sachs did exactly that with the this week’s launch of Marcus, its online-only consumer lending platform.