How concerned should credit unions be about the rapidly expanding marketplace lending arena?
Also known as peer-to-peer lending, borrowers are matched through an online marketplace with investors, such as hedge funds, mutual funds and some individuals who agree to lend a specific amount of money to an individual or small business at a fixed interest rate.
The companies offering MPLs--backed principally by Silicon Valley-based venture capitalists — generally make money by charging a transaction fee upon origination and service fees thereafter.
Trevor Dryer, co-founder & CEO of Mirador Financial, a Portland, Ore.-based loan-processing platform for credit unions and banks, said the biggest attraction of an online loan application is speed and convenience for both borrower and lender.
“When you go to apply for a loan at a bank or credit union, you have to walk into an office, wait around, then speak to one or more loan officers,” Dryer said. “This is all very time-consuming and might require the applicant to take time off from work. After all this, one has to wait at least four to six weeks for a response.”
When applying for a MPL, the borrower typically fills out an online form and can receive an answer within 24 hours or sooner.
“Non-bank lenders essentially remove a lot of the friction that is inherent in seeking loans from banks and credit unions and makes the whole process far less complicated,” said Kathryn Petralia, co-founder & head of operations at Kabbage, an Atlanta-based provider of online working capital which has funded more than $1 billion to small businesses.
And it appears MPL borrowers get approved more easily. Dryer estimates that MPLs approve about 30% of the loan applications they receive while CUs and banks approve 18% to 19%.
Threat to CUs?
This lending marketplace presents a threat to credit unions, said Jason M. Osterhage, SVP of lending at Alliant Credit Union, an $8.4 billion institution in Chicago and a member of the CUNA Lending Council Executive Committee.
“MPLs offer a substitute or alternative for certain loan products offered by credit unions. That makes them competitors,” Osterhage said. “Very early on, MPLs focused on segments of the credit market that were rarely or poorly served by credit unions and smaller banks. More and more, the MPLs are expanding into mainline traditional loan types and targeting mainstream credit worthy borrowers.”
Eugene Danilkis, the CEO of Mambu, a cloud banking technology platform agreed.
He said MBLs are “absolutely a threat” to CUs because they offer a greater choice of products, more flexible products, simpler loan origination process, a more streamlined and user-friendly customer experience, and in some instances lower rates and costs.
Though CUs currently have the advantage of branding in terms of their impact on community, as well as an appeal to a more traditional (read older) audience who are more comfortable with face-to-face transactions, Danilkis said
“However, the long-term competitive advantage is clearly in the court of MPLs unless credit unions can add to their local-community experience by providing a better online and mobile experience on top of more flexible products and support,” he added.
Dryer suggested that the best way CUs could respond to any potential “threat” posed by MPLs would be to aggressively upgrade their technological and software capabilities.
But Charles B. Wendel, president of FIC Advisors Inc., a financial services consulting firm, said MPLs pose no immediate threat to CUs and banks since they each typically focus on different parts of the loan market. Moreover, the portions of the loan business where traditional financial institutions dominate — commercial and industrial loans, commercial real estate, conforming mortgages, credit cards, auto financing — are spheres where MPLs have limited presence.
According to a report from Foundation Capital, a Silicon Valley-based venture capital firm, the amount of loans originated by MPLs has mushroomed to $9 billion last year from about $100 million in 2009. (Analysts at Morgan Stanley put the figure at $14 billion last year.) But either number is only a pittance compared to the overall size of the total loan market.
Indeed, in 2013, total consumer lending revenues in the U.S. amounted to a whopping $420 billion, with real estate loans comprising some $230 billion.
Loan Size
For now, MPLs shell out rather modest-sized loans to individuals and small businesses — generally around $25,000 and $50,000 — according Wendel, noting that many credit unions and banks don’t even operate in this ballpark. “This is an area in which many banks lose money because of the costs involved in originating, underwriting, and monitoring small loans,” he said.
But Daryl Jones, a director at Cornerstone Advisors, who prefers to use the term “digital lenders” in place of MPLs, said he expects more online lenders to begin offering larger loans – that is, in amounts above $50,000, which would bring them into direct competition with CUs and banks.
There are some providers already offering these loans,” Jones said. “For example, SoFi, which originates a number of different loan types, can go up to $100,000 — as does Kabbage, OnDeck, CAN Capital, and others. But I think by far the biggest near-term impact in the $50,000-plus market is with small business lending.”
Regulatory Issues
One of the many myths surrounding MPLs is the assumption that they exist outside the reach of financial regulators.
Last month, the U.S. Treasury Department initiated a study on the benefits of MPLs, raising the likelihood of the imposition of new rules upon the emerging industry.
Antonio Weiss, counselor to Treasury Secretary Jacob Lew, wrote in a blog post that the Treasury Department wants to learn more about the “potential for online marketplace lending to expand access to credit to historically underserved market segments; and how the financial regulatory framework should evolve to support the safe growth of this industry.”
Petralia noted that, as her company Kabbage has entered into various licensing agreements and other deals with a number of large banks, they are already subject to significant regulations through such relationships.
Wendel concurs that regulators are now “sniffing around” MPLs — in fact, just two weeks ago, the Consumer Financial Protection Bureau ordered a subsidiary of prominent marketplace lender Lending Club to repay certain borrowers who may have been confused over the terms of a deferred interest product. The unit, Springstone, agreed to cough up $700,000.
The Future
Dryer cautioned that MPLs currently lack both the customer base and access to low-cost capital required to support small business lending. “And the kind of growth required before they could even hope to help close the enormous funding gap is years, if not decades, away,” Dryer said. “As a result, online lending does not currently operate at the scale or in the ways small businesses need.”
As a solution, Dryer posits that instead of competing against MPLs, banks and credit unions could partner up with them.
Indeed, such partnerships have already occurred, said Wendel, citing deals such as a CRA lending agreement between Citibank and Lending Club; and another partnership pairing up Lending Club with BancAlliance, a consortium of about 200 community banks. Yet another online lender, LendKey, has even formed a partnership with Navy Federal Credit Union, the $70 billion behemoth based in Vienna, Va., to service its student loans.
Osterhage of Alliance said credit unions can cope with the emergence of MPLs by monitoring what MPLs are doing and stay current on trends in the sector.
“Next, they should look for smart ways to partner with an MPL or two to get a closer look at the mechanics of their operations,” he added. “Finally, credit unions should identify the capabilities and practices that can be transplanted from MPLs into their own business.”
As for MPLs themselves, Jones believes, as with almost any “new” industry that finds some success after initial struggles, there will be winners and losers — with failed companies disappearing and others consolidating.
In the nearer term, a report from the Joint Small Business Credit Survey Report, cited that in 2014, about 18% of small businesses stated they applied for credit from online lenders — and that this figures is projected to keep increasing in the coming years.
