There’s been a lot of talk about a slowdown in online lending and an overall weakening in demand for consumer loans.
Technology providers that service the industry aren’t seeing any of it, though. Online lenders are busy growing the securitization side of their businesses, where they package their loans together into investable securities and sell them to institutional investors. To do this, they’re turning to third party service providers.
“Startup online lenders typically start with good technology, user experience, and customer service but they have to feel their way through the financial regulatory world, adjusting as they go,” said Stephen Bisbee, CEO and President of eOriginal, a technology provider active in the Digital Transaction Management (DTM) space. “When they get to the securitization phase of their businesses, they turn for help.”
Securitization is the next stage of online lending
Securitization of online loans is a more complicated process than simply originating loans. Because of the massive increase in scale needed — an individual loan on an online marketplace may only be $10 thousand dollars, but a securitization can be in the hundreds of millions or billions of dollars — it’s imperative that the entire lifecycle of the transaction be digitized.
Take the auto loan industry. The auto loan industry experienced massive growth by creating 2 industry portals that enabled fully electronic auto loans — from dealership to secondary market — in mid 2000. Nissan did its first securitization in 2005 and now, Toyota and Ford both complete over 80% of their transactions electronically.
Marketplace lending is undergoing its own maturation process, too. “As marketplace lending moved from p2p to institutional capital sources, leading platforms began to look at how they were going to take electronic originations and sell them out into market,” recalled Bisbee. eOriginal counts 10 online lenders as clients including Funding Circle, Earnest, SoFi, Upstart, Apple Pie Capital and Borrower’s First.
Online lenders branching out
eOriginal’s Bisbee expects online lenders to continue expanding their product lines, requiring different levels of digitization. “SoFi began with student loan refis but it’s getting into auto finance and more,” he said. “It’s now offering mortgages. Mortgage is where we started 20 years ago, creating the first fully electronic mortgage for online lenders. We can enable everything on a mortgage after origination. In the time share world, with one customer, our firm enabled 180 thousand mortgages in 18 months.”
Based on demand from online lending clients, eOriginal, which charges a yearly platform fee plus transaction fees, has never been busier. The private company recently doubled its sales and revenue estimates for 2016, as its customer base has grown by more than 70%. And CEO Bisbee just isn’t seeing a slowdown: “In our world — when you focus on the securitization side, it’s just a pricing issue. Once you can get out to the secondary market, there’s always a buyer — it’s just a matter of what they’re willing to pay for debt.”
For its part, Digital Transaction Management, as an industry, is set to be a $30 billion market by 2020, according to Aragon Research’s Jim Lundy. For this whole online lending experiment to work, it’s not just about digital signatures: like the auto loan industry, it’s about finding a way to create industry-wide alliances between distributors, originators, investors, and technology providers.
The move towards fully digitzed transactions is also being fueled by the concern that regulation is on its way to the online lending industry. eOriginal has the ability to provide real-time audit and data analytics at the document, transaction, and portfolio level. “The world is moving away from a document-centric perspective to the trusted-data perspective,” Bisbee explain. “In this world of financial services, whether you’re a lender or investor, you should never need to look at a document. You should make decisions based on data and that data needs to be trusted and auditable.”