[Editor’s note: This is a guest post from Matt Burton, CEO and Co-Founder of Orchard.]
The past nine months have seen a serious uptick in volatility in our nascent online lending industry.
News of potential conflicts of interest at Lending Club, investor pullback, and staffing reductions at Avant and Prosper are giving some people pause. But is this pessimism really called for? Is fintech really riding for a fall, or have the media and the market been caught up in a news cycle that doesn’t actually match the reality on the ground? From where I sit, I’d say that the latter is very likely the case.
The truth of the matter is that most industries have to weather periods of volatility like this in order to mature. It may not be comfortable in the short term — and in hindsight, the problems may have been avoidable — but it tends to make industries stronger and more resilient in the long run.
We believe that the most significant cause for collective concern — the shakeup at Lending Club — has unduly served as a proxy for the state of the overall industry. And although many online lenders have suffered to varying degrees as a result of the fallout from those events, most are showing signs of recovering. Only one lender, Vouch Financial, has shuttered. Not what you would have expected based on the doom-and-gloom reporting around the industry.
Online lending is still unique in its ability to meet the demands of the modern consumer and investor by making credit products more accessible, transparent, and customizable. Those capabilities are baked into the DNA of the industry as a whole and can’t be easily removed.
To keep things in perspective, it’s important to remember that the transparency and flexibility that make online lending so appealing to so many individuals and institutions remain unchanged. That isn’t to say, however, that there haven’t been lessons coming out of our industry’s recent troubles.
Underwriting practices, for example, are being reconsidered. Tighter lending guidelines, while reducing some borrowers’ access to credit, will, in the end, result in stronger loan performance for investors. Appealing to investors in this way will allow online lenders to broaden the pool of capital available to their higher quality and more thoroughly-vetted borrowers. The result is a virtuous cycle that is in everyone’s best interest. [Read more…]