Safety in numbers?

If the attendance records at the third annual LendIt USA event are any indication, the online lending market has grown at a rapid pace. There were about 2,500 attendees at the US event this year, compared to 1,000 last year and about 300 at the inaugural event in 2013. Peter Renton, the founder of Lend Academy and host of LendIt events, made a presentation that underlined this growth.

 Renton said 2014 consumer lending volumes totaled $9 billion, with 2015 totals projected to reach $20 billion. The 2014 small business lending estimate was $5 billion, with 2015 volume expected to hit $12 billion. Many new partnerships, financings, expansions and deals were announced over the past year with more trumpeted at the event.

Lending Club was the first among US online lenders to go public last year, with OnDeck following suit soon in December. Industry observers expect SoFi and Prosper to be next to list publicly.

READY FOR TAKEOFF

The conference attendees were excited about these prospects, the mood was downright jovial. Ron Suber, the president of San Francisco-based Prosper, gave an impassioned closing keynote at the end of the first day touting the growth and success of the industry. “There is one word to describe what’s happening here now: wow. We can feel the excitement,” he said.

Not entirely swept away by hubris, he noted that the sector has much further to go in terms of maturation. Many of the online lending executives in attendance said they want to see companies like Lending Club, Prosper and OnDeck become household names. Suber added he likes to stop people on the train and ask them if they recognize these names. The answer is usually no.

Suber delivered a popular presentation to a packed audience. Seeking a parallel for the growth in online lending, he illustrated the evolution of mobile phones, going from the original clunky models which he dubbed a novelty; to a flip phone (“interesting new niche”); to the Blackberry (“great idea”), ending with a modern iPhone which was captioned: “can’t live without it”. He said the online lending industry currently sits between the flip phone and the Blackberry.

The challenges facing the industry are developing sustainability, building scale, product and technological innovation, differentiation and brand building. Further down the line, Suber said, other challenges loom such as an economic downturn, unemployment or interest rates rises, threats to information security and platform failure. Suber said: “There will inevitably be failures and we have to be very aware and ready and be able to explain why a platform failed.”

He concluded by saying that online lenders are taking off among other financial players including wealth management, banking and alternative lenders. The industry must, Suber added, continue carving out a space for itself among, or perhaps with the help of these other players.

Renaud Laplanche, the chief executive of Lending Club, reminded attendees that the naysayers, who said online lending would never take off or compete with banks, were wrong. Laplanche argued that the industry can yet reach new heights with better automation and speed to reach the point where customers can apply for a loan using their smart phones to receive a direct deposit immediately.

 

EXPANSION

OnDeck and Prosper announced a partnership in tandem with the event, whereby they will reference clients to one another. OnDeck also announced expansion into Australia, while sources confirmed to PDI that Estonia’s Bondora will establish a business in the US.

Several online lenders talked about international prospects. London-based Stuart Law, founder of Assetz Capital, said he expects to expand into both the US and other European countries soon. Al Goldstein, from Chicago-based Avant, which recently announced a tie-up with KKR, Jefferies and Victory Park, confirmed they plan to open in two other countries within a year (the firm already lends in the US and UK).

 

MINDING RISK

For investors financing the space as well as naturally skeptical journalists, including those at PDI, there is a question looming: is the industry growing too fast and where will the cracks appear? The operators behind the platforms are thinking about the same issue, looking toward the next credit crisis, regulation, risk and underwriting standards.

 As with any great new idea, some participants said marketplace lending is at the stage where everybody wants in on the action. Dave Girouard, founder and chief executive of Upstart, compared the space to the “automotive industry in the 1920’s, when there were hundreds of people making cars”.  He claimed the online lending industry has yet to go through a washout, where platforms that never reached much scale or failed to differentiate themselves will go out of business, or show weakness during the next financial crisis.

 Meanwhile, Sam Hodges, co-founder of Funding Circle, said he’s banding a group of marketplace lenders together to come up with uniform industry standards. Several of these groups are also thinking about regulation: when it will come and how it will impact them? In the UK, several lending sites including two of the largest, Funding Circle and Zopa, have actively sought to be registered with the Financial Conduct Authority.

 Ultimately, as is the case with banks and alternative lenders at asset management firms, controlling risk will come down to their underwriting capabilities. And several big names in the space said that these firms’ underwriting prowess will be what sets them apart. Both Doug Lebda, founder of Lending Tree, and Larry Summers, the former US Treasury Secretary and an investor in Lending Club, claimed the diversity of underwriting and how these firms think about risk could be what will enable the industry to remain a thriving one.

 “Every lending model will ultimately live and die on its credit analysis,” Lebda said. “Something I worry about, and also love, is how everyone thinks about risk differently. The diversity of underwriting standards is what could save it in the next crisis,” he added.

 And Summers later echoed that point in his keynote address saying, “diverse ecosystems are much more resilient than uniform ecosystems”.

 Between banks, traditional lenders, specialty finance vehicles and marketplace lenders, there are a lot of operational differences. “A financial system that is more diverse will be a financial system that is more stable,” Summers concluded. There’s no arguing with this view.

For online lenders, the challenge is to evolve to maturity quickly and without any nasty hiccup along the way.