Safety in numbers?

With 2,500 attendees at the third annual Lendit USA event, the online lending industry has reached a pivotal point. Already the leading participants are thinking about sustainability and risk.

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. And 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 totalled $9 billion, with 2015 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, and more trumpeted at the event.

The conference attendees were excited about these prospects, and the mood was downright jovial. The benefits are clear: these providers’ technological innovations make it cheaper, easier and faster for both borrowers and lenders to connect, the cost of capital is also normally lower and the lenders still get to take home consistent returns.

However, for investors financing the space, and for your 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 as well as 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 and others said 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, speciality 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.