Clickbait: American Banker Article Declares Marketplace Lending Unsustainable

HatersPublishing on the pages of American Banker, Todd Baker has written off the entire industry of marketplace lending. Baker states, “it should be obvious now that marketplace lending is unsustainable.” A pretty strong statement for a sector of alternative finance that has, until recently, experienced dramatic growth.

And how does he come to write this industry eulogy? Because marketplace lenders earn nothing from holding loans like a bank.  The risk is transferred to the investor, and their only source of revenue comes from fees associated with each loan sale.

If you look at Lending Club, their origination fee is between 1% to 6%. In Q2 the average per loan stood at 5.13%. If you would like to learn more, Lending Club explains it all here. But this is not sufficient to support Lending Club and its brethren, according to Baker, and thus marketplace lending is doomed. Even while online lending is booming around the globe, apparently there is no hope for these Fintech firms.

A senior marketplace lending industry executive shared their perspective with Crowdfund Insider;

“There will continue to be people who have never operated businesses who will continue to write stories for clickbait that will be proven wrong over the quality and performance of MPL over time. The search for yield continues around the world and the investors coming to MPL today are never stronger given our ability to meet their requirements for performance, risk and sustainability going forward.”

Mad Benjamin Money 100 DollarsDuring the past year, Baker has been a regular contributor to American Banker.  His topic of choice?  Why alternative lending is not going to work out and why banks are superior. He is self-described as an “old, stodgy banker”.  Baker is Managing Principal of Broadmoor Consulting. He is also a Senior Fellow at Harvard’s John F. Kennedy School of Government. Before Broadmoor, Baker spent many years working for traditional finance firms like Union Bank and TD Bank. At Broadmore he consults for, you guessed it, really big banks. Baker advises marketplace lenders to shift to something more sustainable – like becoming a bank or a balance sheet lender. Let’s revisit this one in a few quarters.

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  • Loren Picard

    Without getting into all the details Baker provides for his opinion, he does have a cogent argument and the last few years seems to support his positions. Baker is not critiquing online lender; he is critiquing the underlying funding models. As for this piece from JD Alois, I’m not sure what his point is. Quoting an industry executive who uses the word clickbait and then using the word in the title seems to be the only point (really nullifying his own argument, if there is one, by making the article itself clickbait). This is sloppy journalism.

    • crowdfundinsider

      Hi Loren,
      Thanks for the comment.
      I think the last few years have been very positive for online lending. This includes marketplace, balance sheet and hybrid. If you look at the most recent data as provided by Orchard, Q2 is the first significant YoY decline. So is this indicative of a broader trend? I would argue not as the catalysts for the downturn were the departure of Laplanche at Lending Club – an event that clearly rattled investors – and a shaky economy.
      Most online lenders recognized the fickle nature of institutional capital when the economy showed signs of teetering. Banks do have a bit of an advantage when it comes to retail money with deposits but this is something marketplace lenders are attempting to address now.
      You can review an excellent presentation by Dan Ciporin of Canaan Partners here on capital diversification: https://www.crowdfundinsider.com/2016/04/84426-canaan-partners-on-marketplace-lending-capital-diversification-is-the-answer/
      This is another good article that provides insight into changing funding channels:
      https://www.crowdfundinsider.com/2016/04/84749-orchard-there-are-two-sides-to-the-marketplace-lending-slowdown/
      I do not believe a quarter or two are necessarily indicative of a long term trend. So while you and Todd may be ready to dismiss marketplace lending as a funding model, I am not. As I stated in the article – let’s revisit this in a few quarters.
      JD

      • Loren Picard

        JD – As much as I appreciate your response, I do have to say you are missing the point. I don’t recall dismissing marketplace lending. I actually do consulting to the industry and have my own opinions on how the industry will thrive. I only pointed out that Baker has reasons for his position. Your article didn’t provide a cogent argument countering Baker. You relied on an anonymous industry executive for a quote and you yourself are using a pen name. As for advantages, banks have a lot more than a “bit of an advantage” over marketplace lenders. Whether you stay anonymous or not, set aside reports by others (Canaan Partners) and lay out a cogent argument for how marketplace lending will survive and grow. The challenge is to think through all the macro and micro issues and create a path for survival. This is extremely difficult to do.