It has been exactly four weeks since the big Lending Club news. The marketplace lending world has not fallen apart but we are also in a very different place than we were a month ago. So, with this article I want to give a different perspective on the news now that we have had some time to live with the new reality.
So much has been written in the last month, most of it negative, that the casual observer could easily believe the online lending industry is dying. While I acknowledge these are difficult times I also think the fundamentals of our industry remain strong. The original premise of a better deal for both investors and borrowers is just as true today as it was last year.
To many people, myself included, this industry is more than a job. I am personally very passionate about online lending, I continue to believe in it and I want what is best for the industry. I have met hundreds of people at LendIt and other events over the years who feel exactly the same way.
For those of us who care deeply about our industry we know it has been damaged. The question now is this: what are we going to do about it?
This is Our Wakeup Call
Looking back now I can see we got ahead of ourselves. Thinking back to LendIt USA 2015 in New York there was a ridiculous amount of hype about the industry. We all thought we were changing the world and that the party would just keep going on and on.
That was a mistake. We should have kept a firmer grip on reality. Many of us tried to grow too fast, determined to make hay while the sun shines. That may be fine for a tech company like Facebook or Google but in financial services we should have taken a more prudent approach.
But we can’t have our time over again so what are we to do? It is time to rebuild the industry, time to make every company more resilient. Here are some things we can do to help move the industry forward:
This industry began with an ideal to bring more transparency to the financial system. We have moved away from this ideal somewhat in recent years. It needs to return in a big way. I think all major platforms can do much better here. It may mean risking giving away some information that you would prefer to keep private but I think every platform should err on the side of more transparency rather than less.
- Support for a Robust Ecosystem
It is not good enough for a platform to say that their data is trustworthy and clean. Companies like Orchard, PeerIQ, MonJa and dv01 should be encouraged to verify everything for investors. All platforms should be open to working with ecosystem providers like these.
- Enhanced Disclosure
For large investors to get comfortable again they are going to need to see disclosure beyond just the loan book. There needs to be operational and servicing data made available as well as financial information on the state of the business. Not to mention an established compliance culture that can deal immediately with any irregularities that occur.
- Behold the Hybrid Model
Many of the leading platforms in our industry are pure marketplaces, holding no loans on their balance sheet. This has been a good model but when times are tough it can be beneficial to have the ability to fund loans from your own balance sheet. While I still like the pure marketplace, I have moved on from believing it is the best way to run a business. This has nothing to do with having skin in the game, I believe pure marketplaces have that anyway, but rather having the flexibility to fund loans from your own balance sheet can make these lending platforms more stable.
- Resist the Impetus for Rapid Growth
In some ways I think the focus on growth is at the root of the problems we are facing. A culture centered around rapid growth may encourage a tendency to cut corners. I am not saying that is what happened at Lending Club but today rapid growth is going to be seen more as a negative than a positive. We want companies to take on a sustainable growth path that may mean the occasional down quarter and that should be ok.
The Fundamentals are Critical
What has been lost in the noise of the past month is that Lending Club had a great first quarter. Their business fundamentals have been solid. Now, their second quarter will look nothing like the first quarter as they have been dealing with the fallout. No doubt originations and therefore revenue and profits will be significantly down from Q1.
I am hoping every platform CEO has taken a long, hard look at their business over the past month and refocused their management teams on the fundamentals of the business. This means underwriting, service, compliance, marketing, engineering, legal – all the departments of a business need to focus on doing the fundamentals well.
The Rebound Has Begun
While I don’t want to paint too much of an optimistic picture I can tell you that conversations I have had in recent days leads me to believe that a rebound is already underway. Investors that stopped buying loans at the major platforms are now back or about to be back and some of these are large investors.
Now, my sense is we have a long way to go before the industry is back to where it was in Q4 as far as origination volume goes but right now some positive movement is a good thing.
Let’s Not Waste This Opportunity
Everyone is watching us. Regulators are watching. Banks are watching. The media is watching. Investors are watching. What we do as an industry in the next 3-6 months will define us for many years to come. If we go back to the status quo and nothing changes I don’t like our long-term prospects. But if embrace bank-like compliance, become more transparent and open our doors to the ecosystem we will come back stronger than ever. We may end up seeing this time as a positive turning point for our industry.
The events of last month do not undo all the good things this industry has done. We have helped millions of people access credit quickly and easily and we have provided investors with a new high-yielding asset class.
The leading company in our industry made mistakes. That is not disputed. The positive impact these mistakes can have on this industry could be the enduring legacy of this difficult time. Let’s all work together to make it so.