Are we in an online lending bubble?
- Online lenders are setting origination records.
- Are things overheating?
We’re in an interesting time in online lending. After years of fits and starts and boatloads of money flowing into the sector, record originations are being set all over the industry. We recently explored online lending trends going into 2019 and what participants in the sector are expecting in the near future.
Both consumer and business lenders are tracking strongly:
- Square loaned $400+ M in Q3
- GreenSky reported record-high volume
- LendingClub scored record originations
- OnDeck reports record originations
- Goldman Sachs’ Marcus , since starting in 2016, has made over $4 billion of loans
Last week, LendingClub released its third quarter earnings results, and saw a record number of originations – in the quarter alone, totaling $2.9 billion, representing an 18% improvement compared to the same quarter last year. “What this tells us about the industry as a whole is that the demand and desire for alternative lending services continues to remain strong,” Jessie Szymanski, head of institutional investor strategy for LendingClub, told Tearsheet via email.
While personal loans have surged to a record as the fastest-growing U.S. consumer-lending category, according to data from credit bureau TransUnion, it’s fintech firms that are driving a lot of that growth.
Digital and fintech lenders originated more than a third of total personal loans in 2017 compared with less than 1 percent in 2010.
But inside all the congratulatory back-patting, it appears that things might be overheating. Goldman Sachs, which has aggressively expanded in the digital banking and lending space with its Marcus offering, explained that it would be dialing things down a bit, according to Bloomberg.
Anonymous sources inside Goldman Sachs told Bloomberg that the dampened expectations have to do with a concern about the credit cycle. It’s just as likely, though, that Marcus, without any history of running a consumer loan portfolio, is getting antsy about its internal acquisition metrics. In a market with almost infinite demand for credit, it’s very easy to expand — a lender just needs to relax its credit scoring criteria. Perhaps Marcus sees something that says it’s growing its customer base and lending portfolio too quickly.
There are conflicting forces at work affecting customer acquisitions costs. As more businesses and individuals become aware of online lending alternatives, this expands the target market for online lenders. But, at the same time, more money is flowing to advertising new lending options. And as this money filters down to customer acquisition channels, it can drive up the cost of acquisition. SoFi appears to be paying $756 to acquire a new customer. And Fast Company reports that Lending Club and Prosper typically spend $350-$450 to bring in a new borrower.
Acquisition costs typically spike when young online lenders raise their first big funding rounds and they begin to put that money to work in marketing. Those costs then can settle down as these firms garner the necessary expertise to efficiently deploy this capital. But if acquisition costs continue to rise, many of the smaller, less-capitalized lenders may find themselves left behind, as only the largest firms will be able to afford to bring in new customers.