Access to credit is essential to achieving business and economicgrowth. Historically, banks and other financial institutions havebeen the gatekeepers of credit.

Then in 2005, European firm ZOPA pioneered the idea ofpeer-to-peer lending in an attempt to make lending andborrowing easier for individuals. Within a year, thisinnovative debt financing model reached the American shores withProsper launching its online marketplace lending platform.

Soon companies like Lending Club, SoFi, Funding Circle andothers cropped up, offering quick loan processes and easier accessto capital across a wide range of categories from student loans topersonal and small business loans.

Using technology and big data, these online marketplaces havenow evolved into structured networks that include partnerships withinstitutional investors and banks, engaging in both direct lendingand securitization transactions.

This is not a “flash in the pan” segment, though. The onlinelending space has doubled every year since 2010, accordingto Morgan Stanley.

What's more? Analysts predict $1 trillion in new loans will beprocessed through online marketplaces globally by 2025.

While the online marketplace lending industry has faced its ownshare of regulatory upheavals and legal stumbling blocks, it wasonce again looking optimistically at opportunities toward the endof 2016.

Albeit this time the optimism is tempered by a recognition thatgrowth would have to be achieved with a best-in-class complianceculture.

Looking ahead, I foresee four main opportunities as well as fewchallenges that marketplace lenders will face in 2017 as theycontinue to expand and grow.

Opportunities in 2017

1. Bank Partnerships

This year will bring an increased focus on partnerships betweenlending platforms (fintech companies in the marketplace lendingspace) and traditional banks.

A partnership where each party brings its own strengths to thetable – fintech companies bring technology and a morecustomer-centric approach, while banks bring capital and anexisting customer base – is likely to be the most effective routefor both players looking to better address their customers' needsand enter new markets. The collaboration between JPMorgan and OnDeck is an example of such strategic partnerships.

Going ahead, there would also be a surge in “white label”arrangements between banks and platforms where bank customers willbe referred to marketplace lenders for processing loans.

For instance, in the deal between Prosper and Radius Bank, thebanks' customers were given the option to apply for co-brandedconsumer loans on the Prosper online platform. The loans were thenissued by Radius Bank.

2. Regulatory Reforms

The new administration's desire to renew the American“entrepreneurial spirit” by dismantling the Dodd-Frank Act (seen asa barrier for small businesses' access to credit) might translateinto more flexible regulations for marketplace lenders.

Two specific developments in the reforms category could be apossible repeal of the risk retention requirement forsecuritizations of assets other than residential mortgages and ascaling back of the agenda of the CFPB.

In December of last year, the Office of theComptroller of the Currency announced that it will issuespecial-purpose bank charters to qualified fintech companies.According to the OCC, applying a bank regulatory framework tofintech companies will “benefit customers, businesses andcommunities, and will help ensure that these companies operate in asafe and sound manner,” among other advantages.

If this charter becomes a reality in 2017, it could turnbeneficial for fintech platforms burdened by varied, state-by-statelicenses rules. However, the devil lies in the details and we needto wait until the charter is finalized to understand its fullimplications.

The industry can expect to see more such regulatory proposalsfrom the OCC, the FDIC, the U.S. Securities and Exchange Commissionand the U.S. Department of Treasury later this year.

3. Consolidation & Diversification

This year, industry consolidation that started in 2016 willcontinue to accelerate.

One reason would be diversification of some marketplace lendingplatforms into new lines of business as they grow and develop theirofferings. For instance, Lending Club used to offer only consumerloans. It has now entered the auto loans market. Another onlinelender, SoFi, which was earlier focusing on student loans, now alsooffers mortgages and consumer loans.

Through diversification, these players will gradually forcesmaller players out of the market, thereby driving consolidation inthe industry.

4. Intensified Lobbying

Expect marketplace lenders to step up lobbying activities toprotect the industry's interests, given the new administration'spresumed preference to enable expansion of credit for smallbusinesses.

This year is also likely to bring the rise of industry groupssuch as the Innovative Lending Platform Association and theMarketplace Lending Association. Also, be on the lookout forself-regulatory initiatives such as the Structured Finance IndustryGroup's disclosure projects and the SMART Box proposal.

Challenges in 2017

1. Higher Capital Costs

While marketplace lenders earlier had a relatively easy timeraising money and were less tightly regulated than the biggestbanks, going forward online lenders are going to have higherfinancing costs.

Scandals involving data glitches in the case of Prosper anddisclosure issues with its rival Lending Club have made investorsskittish. Consequently, this has made it more difficult formarketplace lenders to find the capital they need to makeloans.

It will be some time before investor confidence is restored inthe industry. A more comprehensive regulatory regime might mitigatethis challenge.

2. Increasing Customer Acquisition Costs

High customer acquisition costs will continue to plague theindustry and add considerable costs to an otherwise low-overheadventure.

While marketplace lenders are looking at cheaper means to expandtheir lending pipelines through strategic partnerships andreferrals, stiffer competition within the industry will put anupward pressure on the cost of acquiring new customers thisyear.

3. Intense Competition

There will also be increased competition from big banks andfinancial institutions like credit card companies that are nowwaking up to the opportunities of direct online lending.

This poses the potential risk of deep pocketed, low cost ofcapital entrants offering attractive terms to capture betterquality borrowers. Even major investment banks like Goldman Sachsthat earlier repudiated lending are now expanding their reach with this very strategy.

While industry players seem cautiously optimistic about growth,they need to be cautious about any unforeseen adverse developmentson the regulatory front. Moreover, diversification and strategicpartnerships would be used to pare down costs and expand lendingpipelines.

All in all, 2017 will be an interesting year for the marketplacelenders to innovate and turn the tide in their favor.

Anton Eremenko is Founder & CTO atLendline. He can be reached at [email protected].