Online lenders took a hit earlier this year after the abrupt departure of the top executive at market leader Lending Club (San Francisco).
However, the online lending business is expected to continue growing, though perhaps at a slower pace, according to industry experts at a presentation called "Disruption of Lending," on Sept. 15 at Verisk Analytics, in Jersey City. This presentation was part of the New Jersey Technology Council's Fintech Conference 2016.
The panelists were: Matt Burton, cofounder and CEO of Orchard (New York, N.Y.); Jared Hecht, cofounder and CEO of Fundera (New York, N.Y.); Brad Ellis, managing director and director of technology at Square 1 Bank (New York, N.Y.); Croom Beatty, director of strategy at Payoneer (New York); and Evan Ambinder, vice president of business development at Bankrate (New York, N.Y.). The panel's moderator was Scott Feldman, managing director at Susquehanna Growth Equity (Bala Cynwyd, Pa.).
Online lending, sometimes known as “marketplace” or “peer-to-peer” lending, has grown rapidly over the past several years. According to industry statistics, 13 of the sector's largest firms made loans in the U.S. totaling $15.91 in 2014, a whopping increase of 700 percent over 2010. In the first six months of 2015, those same firms lent a total of $12.47 billion nationwide.
The industry is still recovering from the announcement in May by Lending Club, the largest online lender in the U.S., that CEO Renaud Laplanche would be resigning as a result of his alleged involvement in a failed loan sale.
Lending Club's woes were one of the red flags signaling investors that other online lenders may soon be in trouble. Investor uncertainty over the future of this business led to a steep drop in online loans to U.S. consumers in the second quarter of this year. "This was the first time in five years that this sector was knocked off its feet,” Burton said.
Hecht agreed that the Lending Club debacle sent shock waves through the entire industry, causing many investors and industry insiders to contemplate the fate of online lending. "It does give us pause when you see something like that."
But Hecht and the other panelists contended that online lending remains a growth industry and that Lending Club's bad luck was an isolated incident. Feldman also noted that there is no shortage of companies getting into this business, based on the hundreds of business plans that he has read over the past couple of years. "We're seeing no slowdown in new online lending businesses," he said.
Ambinder, whose company provides financial rate information, added that major concerns over the viability of online consumer lending seem to have mostly faded. "In general, it's pretty healthy on the consumer side."
But the demand for online loans by small-business owners may be reduced by the difficulty of understanding the many different types of loan products available to them. "For a small-business owner, this can be very confusing," Hecht said.
It is only a matter of time before the large banks — such as JPMorgan Chase & Co. and Wells Fargo — moved into online lending. Hecht expects that most of the big banks will become online lenders within the next five to 10 years, though "how wide they will open the credit box is unknown."
However, Burton said that the banks are facing serious obstacles to becoming major players in online lending. One of them is a concern that online lending will sound the death knell for loan operations at the banks' brick-and-mortar branches, with many of them already being shuttered because of the rising popularity of digital personal banking.
Burton doesn't think that a lot of banks will go the online-lending route because it would be "effectively cannibalizing the [branch] business."
But if banks with antiquated legacy systems don’t adapt to the digital consumer, they are going to have a difficult time competing with the nimbler, more technologically advanced online lenders. "I think they are really going to struggle to keep up with the innovation," said Burton.
While Lending Club, Prosper (San Francisco, Calif.), Funding Circle (San Francisco, Calif.), Square 1 and several other companies now dominate the online-lending sector, the biggest contender may still be a twinkle in some entrepreneur's eye. "The player that will be winning the lending space hasn't even been launched yet," Ellis said.