Access to credit is essential to achieving business and economic growth. Historically, banks and other financial institutions have been the gatekeepers of credit.

Then in 2005, European firm ZOPA pioneered the idea of peer-to-peer lending in an attempt to make lending and borrowing easier for individuals. Within a year, this innovative debt financing model reached the American shores with Prosper launching its online marketplace lending platform.

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

Using technology and big data, these online marketplaces have now evolved into structured networks that include partnerships with institutional investors and banks, engaging in both direct lending and securitization transactions.

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

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

While the online marketplace lending industry has faced its own share of regulatory upheavals and legal stumbling blocks, it was once again looking optimistically at opportunities toward the end of 2016.

Albeit this time the optimism is tempered by a recognition that growth would have to be achieved with a best-in-class compliance culture.

Looking ahead, I foresee four main opportunities as well as few challenges that marketplace lenders will face in 2017 as they continue to expand and grow.

Opportunities in 2017

1. Bank Partnerships

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

A partnership where each party brings its own strengths to the table – fintech companies bring technology and a more customer-centric approach, while banks bring capital and an existing customer base – is likely to be the most effective route for both players looking to better address their customers' needs and enter new markets. The collaboration between JPMorgan and On Deck 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 will be referred to marketplace lenders for processing loans.

For instance, in the deal between Prosper and Radius Bank, the banks' customers were given the option to apply for co-branded consumer loans on the Prosper online platform. The loans were then issued by Radius Bank.

2. Regulatory Reforms

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

Two specific developments in the reforms category could be a possible repeal of the risk retention requirement for securitizations of assets other than residential mortgages and a scaling back of the agenda of the CFPB.

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

If this charter becomes a reality in 2017, it could turn beneficial for fintech platforms burdened by varied, state-by-state licenses rules. However, the devil lies in the details and we need to wait until the charter is finalized to understand its full implications.

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

3. Consolidation & Diversification

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

One reason would be diversification of some marketplace lending platforms into new lines of business as they grow and develop their offerings. For instance, Lending Club used to offer only consumer loans. It has now entered the auto loans market. Another online lender, SoFi, which was earlier focusing on student loans, now also offers mortgages and consumer loans.

Through diversification, these players will gradually force smaller players out of the market, thereby driving consolidation in the industry.

4. Intensified Lobbying

Expect marketplace lenders to step up lobbying activities to protect the industry's interests, given the new administration's presumed preference to enable expansion of credit for small businesses.

This year is also likely to bring the rise of industry groups such as the Innovative Lending Platform Association and the Marketplace Lending Association. Also, be on the lookout for self-regulatory initiatives such as the Structured Finance Industry Group's disclosure projects and the SMART Box proposal.

Challenges in 2017

1. Higher Capital Costs

While marketplace lenders earlier had a relatively easy time raising money and were less tightly regulated than the biggest banks, going forward online lenders are going to have higher financing costs.

Scandals involving data glitches in the case of Prosper and disclosure issues with its rival Lending Club have made investors skittish. Consequently, this has made it more difficult for marketplace lenders to find the capital they need to make loans.

It will be some time before investor confidence is restored in the industry. A more comprehensive regulatory regime might mitigate this challenge.

2. Increasing Customer Acquisition Costs

High customer acquisition costs will continue to plague the industry and add considerable costs to an otherwise low-overhead venture.

While marketplace lenders are looking at cheaper means to expand their lending pipelines through strategic partnerships and referrals, stiffer competition within the industry will put an upward pressure on the cost of acquiring new customers this year.

3. Intense Competition

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

This poses the potential risk of deep pocketed, low cost of capital entrants offering attractive terms to capture better quality borrowers. Even major investment banks like Goldman Sachs that 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 developments on the regulatory front. Moreover, diversification and strategic partnerships would be used to pare down costs and expand lending pipelines.

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

Anton Eremenko is Founder & CTO at Lendline. He can be reached at LendlineContactanton@lendline.io.

Instant Insights /

Online Marketplace Lending: The Landscape for 2017

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