When 2,400 entrepreneurs, investors and other participants in the booming marketplace lending industry converged this week in New York, the mood was not as euphoric as one might have expected.
The sector, sometimes called peer-to-peer lending, continues to grow like a well-irrigated weed. Loan volume reached an estimated $9 billion last year, up from just $1.2 billion two years earlier. Everyone from Google to Citigroup wants a piece of the action. With a river of cash flowing into the industry, hundreds of new loan platforms have sprung up.
"It seems like every venture capitalist on the planet is trying to finance the next Lending Club or Prosper," said Doug Lebda, chief executive officer of the comparison-shopping site Lending Tree, during one panel discussion.
But nearly everyone at the LendIt conference in Times Square seemed to be steeling for an eventual shakeout.
Maybe it's the fresh memory of the financial crisis, when liquidity dried up rapidly and credit performance soon soured. Or perhaps it's the awareness that marketplace lending has benefited from certain favorable conditions, including low interest rates and strong repayment rates, that won't last forever.
"There will be failures of platforms. It's natural. It's OK," Prosper Marketplace President Ron Suber predicted during a keynote address Tuesday. "It's going to happen, and we need to talk about it."
Some of these cautions have been aired before. Skeptics have been wondering for some time whether enthusiastic institutional investors, including hedge funds, will exit the sector when interest rates rise and returns in other asset classes become more attractive.
There are also lingering questions about whether regulators will eventually put tighter restrictions on the loan platforms. And some critics have argued that valuations in the sector are too high, especially since Lending Club held its initial public offering in December the San Francisco firm is not yet consistently profitable, but its market capitalization on Thursday was $7.3 billion.
This week, fresh concerns were voiced about the impact of loan default rates finally rising from their historically low post-recession levels.
"We all have to be of the mindset that we're in a very virtuous credit cycle right now," said Mike Cagney, the chief executive officer of SoFi, a platform that underwrites student loans, personal loans and mortgages.
"My daughter could come up with an underwriting methodology based on what band you like, and it would work wonderfully well right now," he joked, drawing laughs from the audience. "If you like My Chemical Romance, you're an A-1 credit."
Although Cagney expressed confidence in SoFi's methods for evaluating loan applicants, he also said that some firms are taking a marginally more lax approach to underwriting.
Marketplace lending's roots are in debt consolidation loans to credit card users who have solid credit scores. But some newer entrants have been targeting consumers who represent riskier bets.
"What keeps me awake at night," said Joseph Toms, president of Freedom Financial Asset Management, which runs a platform for personal loans, "is irrational players pricing incorrectly in the marketplace."
The pressure to find enough new customers, in order to sate the hunger of loan investors, is affecting firms that lend to prime consumers as well as those that target subprime borrowers. That is partly because of what conference attendees consistently described as shrinking loan spreads across the industry.
Nigel Morris, a co-founder of Capital One Financial who now sits on Prosper's board, cautioned that underwriting standards may cave when investors complain that the platforms are not delivering the loan volume they promised.
Because the lending platforms derive the vast majority of their revenue from what are essentially origination fees, they have an incentive to keep their loan machines humming. "And it's very easy to work backwards from what your investors want in terms of growth, rather than working forward from what your own internal models say the market will sustain," Morris said.
The flip side of that argument, which was also made at the conference, is that the loan platforms have an incentive to ensure that their investors get repaid. Otherwise, the investors will flee, and the marketplaces will go belly-up.
SoFi's Cagney pointed out that the loan platforms are not leveraged, since they aren't the lenders. That architecture could limit the contagion if certain loan platforms do fail. "If there was an end, it would be more in a whimper than a bang," Cagney said in an interview.
Still, the prevailing view in New York was that consolidation is coming to the marketplace lending industry whether through mergers, failures, or both. Entrepreneurs were eager to make the case that their companies will be among the survivors.
Despite the worries, most conference attendees seemed awed by the speed and scale of marketplace lending's rise, and convinced that the industry will weather any rough patches ahead.
"Valuations aside, you can't call this a bubble. This is really a trend," Peter Renton, a co-founder of the conference who also runs the industry website Lend Academy, said during a presentation. "It's not cyclical. It is here to stay."