Marketplace Lending 2016: Bruised but not Broken

2016 was a tumultuous year in p2plending. Maybe it's related to growing pains or maybe to something else entirely. The industry definitely took its bumps. Let's look at some of the major trends in marketplace lending over the course of this year.

Lending Club's Issues

Founder and former CEO Renaud LaPlanche was the biggest story in p2p lending this year with the fraudulent loan sale that led to his departure from the company. Other top execs have left, most notably the CFO and the Chief Marketing Officer, since the summer. Most of the biggest lenders are back on the platform after taking a break to see how all this would shake out. New CEO Scott Sanborn is working to rebuild confidence in the platform and he's doing a good job so far.

Coverage: My coverage of it was 2 posts on what happened and the letter sent to LC's institutional investors. If you haven't read this letter yet, even if you aren't an institutional investor, you should. Just follow the link.

Additional coverage was practically everywhere in the late Spring/early Summer when this happened. Here are 3 examples from the WSJ, NY Times and CNBC.

Increased Defaults in Consumer Loans

LC, Prosper and Avant all had an increasing number of defaults this year. It's the first year since marketplace lending got more popular and mainstream that defaults rose from the previous year. While they all acted and reacted differently to it, one thing all 3 did was a reduction in staff. The increased defaults look to be from both the 2015 and the 2016 vintages.

Coverage: LC chargeoffs are examined in detail on PYMNTS.com blog. Prosper's performance and staff cuts are outlined in this Bloomberg piece.  Fortune goes over the LC staff cuts. Crowdfund Insider covered the Avant staff cuts and employee buyout offer (to but by attrition instead of layoffs).

Securitizations Increasing and Better Quality

Securitizations in P2P Lending are on the increase in 2016. Through the first 3 quarters, this year's securitizations are up 86% from 2015. SoFi is one of the leaders in this area due to their size and their market: student loans. Lending Club did a $100 million securitization in December that was rated, a good sign. If you like this market, then you need to be reading PeerIQ. They are the source for securitization info for our industry.

The first European marketplace lender securitization was done in April, also a rated transaction, issued by UK and US small business lender Funding Circle. The securitization was for UK loans only. More rated transactions mean better quality in the pool of loans that are securitized.

Coverage: Forbes has a good piece on the overall market for securitizations across marketplace lending. The LC securitization was covered in this AltFi piece. The rating agency Moody's has some nice analysis reported on ABL Advisor for the entire industry as well.

OCC Fintech Bank Charter

A big regulatory development this year is the OCC Fintech Bank Charter.

Unlike some of these developments, this is an overwhelmingly positive development.

The OCC is the Office of the Comptroller of the Currency, a government agency part of the Dept of Treasury, is the first regulator inline of federal and many state banks. They issue banking charters.

The first step was a white paper the OCC wrote exploring how to work with fintech firms. You can check out the white paper itself right here. It's a downloadable pdf file.

Then, in December, the OCC announced that it will grant what it calls a Special Purpose Banking Charter to fintech firms. Firms that get this charter cannot accept deposits with the FDIC insurance, however, they also don't have to go into each state where they want to operate and get approved on a state by state basis. This applies not just to p2p lenders but digital payments companies as well.

As many of you know, I write about and cover Bitcoin as a financial tool. So far, no one has indicated if a Bitcoin company can go through this process too. My opinion is that I think they can and would love to see one try. Coinbase or Circle (both exchanges of USD for BTC) are the most likely candidates.

This is a huge development in terms reducing regulatory costs, giving regulatory guidance and giving peer lending platforms a clearer picture of what to expect on the regulatory front. All positives.

Coverage: The best coverage of this development that I saw were explanations given by the WSJ and American Banker.  Think Advisor does a really nice job as well. You can check out what they had to say from earlier this month.

Goldman Sachs Enters Market with Marcus

Wall Street bank Goldman Sachs decided to enter the marketplace lending market this year with its platform called Marcus. Marcus is working as a direct competitor to LC and Prosper with their offering of unsecured consumer loans up to $30,000 with a focus on prime borrowers. The platform opened in October.

Coverage: Coverage was widespread for this as Goldman is the first Wall Street firm to make a direct play into p2p lending. NY Times Dealbook, Forbes and Business Insider had some of the best coverage on this big development for the industry. The Forbes piece talks about the inner workings and tech behind the Marcus platform that Goldman is using.

This looks to be only the beginning for Wall Street and/or large banks and financial institutions getting more involved in the industry. Is that good or bad or neither? We will have to wait and see.

Small Business Lender Issues

The small business online lending platforms struggled in 2016, especially compared to consumer and student loan platforms. One of my favorite small business lenders, Dealstruck, has stopped originating new loans and the platform is shut down. They are only servicing their own existing loan portfolio. Another platform, more in the merchant cash advance space, Can Capital went through an executive reshuffle and they are also not originating loans at this time. On Deck Capital, also in the merchant cash advance space, has seen its stock value cut by 50% this year. Funding Circle, which has operations in the US and the UK cut its 2016 originations by 50% over 2015 in a move to help control and monitor risk in the US market.

Coverage: AltFi and Bloomberg covered the Can Capital activity as Can is one of the biggest online lenders in the country. The WSJ covered both Dealstruck and Can in the same article.

The news here is not all bad. The small business lenders will have to improve credit, risk management, and collections and if they do, they will be able to grow and thrive in the coming years. One bright spot in small business lending is the factoring/receivables financing platforms. Two of the top performers here, BlueVine and P2BInvestor, are both growing, raising money and managing risk well.

Conclusion

Wall Street and banks are more involved in our industry than ever before and I expect that to continue. Their involvement will be both the development of new platforms and partnering with existing platforms.

The platforms themselves had a bumpy and uneven year overall. Student loans did well but consumer and small business struggled. This shakeout of some of the platforms is part of the natural maturation of the industry and some platforms will merge, be acquired and also fail as a result of this maturation process.

On to 2017. Hope to see you at LendIt in NYC in March.

By the way, LendIt is the industry's biggest conference and I have a discount code you can use if you want to go. Save 15% with my code: P2PLE17USA

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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