Online lending has been a very popular space of late. Investors have risked billions of dollars of risk capital in getting these platforms up and running. Startup online lenders like LendingClub and Prosper are lending billions of dollars out to individuals every month. Business lenders like Kabbage and Funding Circle provide access to capital for thousands of small businesses who either can’t or won’t go to traditional sources of funding. But not all is peachy in online lending.
Here are 9 things that may change your view on the online lending industry:
The lower end of the credit spectrum is deteriorating
Looking at the LendingClub data, higher credit quality loans have been performing relatively in line with how they’ve performed historically. That’s true of the the platforms 36-month loans as well as the 60-months. Some of the more recent vintages, highlighted in the image above, have charge-offs levels above historical norms.
Action is probably on the way to further regulate the industry
In early March 2016, the Consumer Financial Protection Bureau requested borrowers to alert the federal agency of any complaints they have about online lending firms. Experts believe this is an initial shot across the bow as more oversight is thrust upon these startup lenders. Goldman Sachs is probably sensing this move as it readies its own offering in online lending — the bank recently hired a former CFPB attorney to head up compliance.
The industry sends a lot of direct mail…a lot
“In July alone, Lending Club mailed 33.9 million personal-loan offers,” the Wall Street Journal reported. “The average monthly volume of personal-loan offers sent through the mail has more than doubled in two years to 156 million in the year through July from 73 million in the same period in 2013,” it added. The new CMO at online lender to millennials, Upstart, said his firm is most excited about acquiring new borrowers via direct mail.
China suffered one of the largest online lending scams in history
Ezubo, which means easy-to-lease in Chinese — is being investigated for alleged illegal operations. Chinese authorities believe 95% of the borrower listings on the online lender’s website were fake. 21 executives of the Internet firm were recently arrested as Chinese officials estimate that the firm defrauded investors of 50 billion yuan ($7.6 billion).
Online lenders are dialing back using Facebook to assess credit worthiness
It’s hard to assess the creditworthiness of young borrowers in part because they just don’t have a lot of credit history. So, online lending has required the upstart lenders to create their own credit models. One input they were using were borrowers’ Facebook profiles. The idea was that by scanning a borrower’s presence on the social network, an online lender can take in enough personal data to correlate it to the likelihood of responsible payback. Anyway, that’s not happening now as Facebook is decreasing the amount of data is makes available to these players. It appears Facebook doesn’t want to get regulated as a credit agency.
Online lenders are creating their own hedge funds to fund their loans
The entrance of institutional investors into the online lending space helped form the industry. When they were first launched, loan marketplaces suffered from sluggish demand from investors. By tapping into professional investment vehicles, the industry went from peer to peer lending to marketplace lending. But these sources of capital aren’t endless and in one case, an online lender (SoFi) is creating its own hedge fund to invest in the loans on its platform (and on other platforms).
Online lenders becoming popular for small business…but they’re not happy with them
Small businesses are going online to find access to credit. A new survey from the Federal Reserve Bank of Richmond showed that over 20 percent of small businesses have applied with an online lender because they’re finding success there (online lenders had the second highest rate of approval at 71 percent). But not all is peachy in online lending-ville — the survey found that approved firms were generally not very satisfied with their experience. In particular, these firms cited concerns with interest rates and unfavorable repayment terms.
One of the most accurate indicators of SMB credit worthiness is…shipping patterns
Online lender Kabbage uses a variety of different sources of data when it looks at loan applications. Kabbage, which has funded over $1 billion in loans to small businesses, found that analyzing the shipping patterns of small businesses was, in itself, an effective basis for a credit model. In fact, credit models based on shipping patterns outperformed a traditional FICO-based model.
Lenders forwarded 924 million yuan ($142 million) on Chinese P2P platforms for down-payment loans in January, (more than 3x the amount made last July)