In the world of alternative finance, one US industry was probably happy to see 2016 end.
Online lending, both marketplace lenders (née P2P lending) and balance sheet platforms, hit the proverbial brick wall during last year. Rumblings of a more challenging environment picked up in Q1 of 2016. The second quarter brought the departure of Lending Club’s founding CEO. Institutional investors ran for the door.
Prosper, the number two marketplace lending platform in the US, was not spared the struggle. Having originated $7.9 billion in loans since inception (as of September 2016), some their largest investors “paused or significantly reduced their purchases” of loans.
As investor demand declined, Prosper endured a decline in transaction fee revenue. The company predicted a further decrease in transaction fee revenue in the fourth quarter of 2016 vs. 2015 as well.
Following the tepid financial results, Prosper quickly took action to increase the amount of capital committed to making purchases through its marketplace. These actions included launching a new line of asset management products, improving the retail investor experience, and pursuing strategic transactions with large institutional investors. Rumors churned that Prosper may be up for sale as it searched for capital. One casualty of the turmoil was Prosper CEO Aaron Vermut who was replaced by then-CFO David Kimball.
According to the most recent 10-Q filing, transaction fee revenues reached its lowest point for the year in July 2016. Transaction fee revenues then increased in August and September. Prosper said they expected transaction fee revenues to increase in the 4th quarter of 2016 from the third quarter of 2016 (but still below year prior). All the while, Prosper was streamlining operations to reduce cost.
The one constant in the lending universe of turmoil has been Prosper President Ron Suber. A regular speaker at alternative finance conferences, Suber continues to extol the virtues of online lending and the potential for future success. While his message has been toned down a bit, Suber remains the most prominent voice advocating on behalf of the online lending industry.
Crowdfund Insider contacted Ron for some insight into marketplace lending. Our conversation is published below.
Crowdfund Insider: 2016 was a challenging year for online lending, in your opinion what were some of the biggest issues the industry encountered during the year?
Ron Suber: In the oft-cited words of Nobel laureate Bob Dylan—”the times they are a-changin”—-may be the most accurate description about our industry.
For everyone involved, the 2016 journey has been intense, educational and exhilarating causing many to be both overly optimistic and overly pessimistic at times.
What I’ve learned:
Change is the only constant. Victory goes to the ones who change and adjust best because companies evolve, technologies become outdated, regulations change, relationships morph, and opportunities appear in a shifting landscape.
Crowdfund Insider: What is your opinion on the regulatory environment for online lending?
Ron Suber: Some of the new rules and regulations will bring even more trust and transparency to the industry as well as EAU (Education, Awareness, Understanding) which will help us achieve our goals and mission.
Crowdfund Insider: What about the securitization of marketplace lending loans?
Ron Suber: Securitizations are a critical component to the future success, growth and distribution of assets for the global online lending industry. They must be structured right from day one, consistently distributed to the appropriate investors, provide performance as expected along with transparency to continue successfully.
Crowdfund Insider: Can you update on institutional funding channels for marketplace lending?
Ron Suber: The insatiable search for short duration yielding assets continues globally from Banks, Asset Managers, Insurance Companies, Pensions, Endowments, Foundations, SWF, Family Offices, Individuals and more around the world. The opportunity for us to continue to create the “Alternative Fixed Income” asset class is bigger than ever.
Once the secondary market evolves and matures we will see more listed vehicles and significant new assets flow into the industry seeking the returns we generate along with the liquidity required. And lower costs of permanent capital will find the structures, loan quality, and loan volumes it needs too.
Crowdfund Insider: Demand for credit remains robust. How will online lending continue to be competitive?
Ron Suber: Each platform must continue to update/improve the pricing, credit, risk and underwriting models while incorporating new sources of data. The advancements in machine learning, identity/income/employment verification methods along with new borrower acquisition channels will enable the leading platforms to extend their competitive advantages.
Crowdfund Insider: What are your predictions for US online lending for 2017.
Ron Suber: Progress will continue to be made, but it will not be a straight line. What we are all doing is hard, complex and rapid changes will continue.
The rails we laid are taking hold as the long-term shifts we anticipated are just starting to accelerate. Product expansion will continue across all aspects of consumer, small business, franchise, mortgage, real estate and student lending.
My hope for 2017 includes platforms become profitable, maintain equilibrium and the concept of “Growing the Pie” continues so that there will be more for everyone …. investors, borrowers, online lending platforms, the ecosystem and more.
If you see a person, who works for an online lender … Just give them a hug or buy them a drink as they deserve it for making it to 2017