The Customer Effect

Moody’s: US online lending market plagued by weakness

  • "Online lenders haven't achieved adequate profitability, and rapid growth exacerbates the volatility of their performance."
  • Some online lenders have spent as much as 55 percent of revenue on sales and marketing.
close

Email a Friend

Moody’s: US online lending market plagued by weakness

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.

0 comments on “Moody’s: US online lending market plagued by weakness”

The Customer Effect

‘Indian Country has been plagued by systemic red-lining’: Indigenous communities are the most unbanked in the U.S.

  • Indigenous people in the U.S. and Canada continue to face institutional discrimination in their banking experiences.
  • Indigenous-owned banks and enterprises are paving a path for economic autonomy and prosperity for their communities.
Rimal Farrukh | February 09, 2021
The Customer Effect

‘They blamed me’: Banks aren’t doing enough to service those suffering from mental health issues

  • Mental health related services remain largely under-represented in fintech and banking spaces.
  • Empathy training for customer service experiences and accessible apps can help support people with mental health problems manage their money.
Rimal Farrukh | January 26, 2021
Member Exclusive, The Customer Effect

Citizens Bank’s Beth Johnson: ‘Personal interaction remains important to customers’

  • What bank clients expect from their institutions is changing, according a new Bank Experience Survey.
  • Citizens Bank CXO Beth Johnson joins us to discuss the findings of the research and how it's impacting banking today and in the future.
Zachary Miller | August 11, 2020
Member Exclusive, The Customer Effect

With deposit volume growing 705% in April, MANTL raises $19 million

  • MANTL, which helps banks open digital accounts, has experienced strong growth during the pandemic.
  • The company is also announcing an additional fundraising.
Zachary Miller | July 16, 2020
The Customer Effect

Now under the Linux Foundation, the Fintech Open Source Foundation wants to accelerate software development across financial services

  • FINOS runs 11 programs driven by more than 30 financial services organizations and technology members.
  • Aligning with Linux, the group will have more resources and reach to encourage open source software development.
Zoe Murphy | April 28, 2020
More Articles