Editor’s Note: This commentary originally appeared, in slightly different form, here.

Act more like a traditional bank, and less like a tech startup. That is what some marketplace lenders appear to be trying to do to appease some investors and solve some operational issues. Acting like a traditional bank, however, could be a slippery slope. Operational changes may be enticing to some investors, but they threaten the very foundation of marketplace lending, potentially shutting out the segment of the population that marketplace lending was meant to serve. Evolution was expected. Regression was not. The way forward lies somewhere in the middle.

The moves toward more traditional banking are rooted in marketplace lending’s recent wild ride. Explosive growth from 2010 to 2015 has been followed more recently with sobering news of the forced resignation of Lending Club’s founder and CEO, industry layoffs, warnings by rating agencies of rising borrower delinquencies, borrower suits alleging violations of state usury laws, and tighter regulatory oversight at both the federal and state level. Optimism has faded. Growth projections of some of the largest players have flattened.

Marketplace lenders sought to disrupt the traditional bank model, offering a technology-driven product to an underserved market. Now changes in operations could mean a step backward from that vision. Adobe Stock

Already, some lenders have been able to address investor concerns and, as a result, have attracted increased investment. These lenders are taking actions that ultimately will bring them more in line with established banks, such as maintaining loans on their balance sheets, sponsoring securitizations and placing former Wall Street bankers in key executive roles. Consistent with a movement back toward traditional lending, some marketplace lenders are making smaller loans with higher interest rates and shorter maturities, based on tighter underwriting guidelines.

Notable examples of lenders taking on or exhibiting traditional banking characteristics and concerns include Social Finance Inc.’s bid for a state-issued industrial bank charter, OnDeck Capital’s plans to cut costs and become profitable, and the push for an Office of the Comptroller of the Currency charter for fintech firms.

These changes may address investor concerns and, as a result, attract increased investment, but at what cost? Marketplace lenders sought to disrupt the traditional bank model, offering a technology-driven product to an underserved market. Now changes in operations could mean a step backward from that vision. Tighter credit guidelines, higher interest rates and shorter maturities may mean that the consumers and entrepreneurs that marketplace lenders once sought to serve could soon be shut out. Also, further innovation in lending may be hampered if tech-driven executives are forced to play by traditional banking rules. While evolution in a growing industry is to be expected, it shouldn’t come at the expense of credit to underserved markets and advances in financial innovation.

The winners in the industry will be those who find the right mix of talent and business practices to successfully thread the needle between traditional banking and innovative lending platforms. The losers will be those who fall back to the traditional model without a vision for using available and new technologies to create greater efficiencies in the way people access credit.

Joseph Cioffi

Joseph Cioffi

Joseph Cioffi is chair of the insolvency, creditors' rights and financial products practice group at the New York-based law firm Davis & Gilbert LLP.

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Massimo Giugliano

Massimo Giugliano is an associate in the insolvency, creditors' rights and financial products practice group of Davis & Gilbert.

BankThink submission guidelines

BankThink is American Banker's platform for informed opinion about the ideas, trends and events reshaping financial services. View our detailed submission criteria and instructions.