There are several people in the online lending industry, inclusive of marketplace and balance sheet lending, that truly know just about everything going on in this evolving sector of finance. Ram Ahluwalia, CEO and co-founder of PeerIQ is one of these persons.
His company PeerIQ is uniquely positioned to observe both loan originators and investors participating in the online lending ecosystem. PeerIQ enables the secure movement of money into the alternative lending sector by institutional investors. PeerIQ also takes in incredible amounts of lending data and standardizes it making the data actionable for all sectors of the online lending market. PeerIQ provides other services like real time portfolio management with forecasting and monitoring. If you want to invest in alternative loans in a big way, you are probably talking to PeerIQ.
The company has been an unqualified hit with users and, correspondingly, investors. An all star list of backers include famous names in finance like John Mack, former CEO of Morgan Stanley, Vikram Pandit, former CEO of Citi, Arthur Levitt, former SEC Chairman and many more. PeerIQ has global aspirations and it has the horse-power and the backing to make it happen.
I recently had a chance to speak with Ahluwalia, and I first asked him for his spin on the online lending market during 2017. Ahluwalia was very positive about the past 12 months. His comments reflected PeerIQs most recent Marketplace Lending Securitization tracker, a periodic report, that declared “an unprecedented 18 months of non-stop issuance.” That’s pretty bullish.
Ahluwalia told me;
“2017 has seen a resurgence in investor growth and confidence in online lending. ABS issuance is up about 83%. Execution spreads have tightened substantially. This performance is all on the ABS loan side but has not translated yet into the equity valuations. “
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He added that he expects to see continued attention on credit performance in 2018 as they are still seeing normalization of credit performance.
“There is an increase in competition to acquire borrowers from aggregators such as Lending Tree and banks that are entering online lending,” added Ahluwalia.
Overall, he sees prospects for the securitization market looking very good for 2018. He expects 30% growth in ABS issuance for next year while adding that PeerIQ underestimated the growth for 2017.
“It came in almost double. Investor adaption is strong. Student refi is going mainstream. Private equity is buying loans now.”
Ongoing tech innovation is playing an important role as well. None of these platforms remain static as models are continuously being updated and improved upon;
“Several lenders [have] cited the shifting competitive landscape and the role of technology in driving innovation and risk management,” said Ahluwalia. “Capital One, American Express, and JP Morgan, are investing heavily in technology and partnering with Fintechs to develop competitive advantage. LendingClub introduced a next-generation credit model that no longer relies on FICO scores and utilizes machine learning.”
Without mentioning specific names, he expects platform consolidation around major scale players in the coming months, a theme that has been reflected by other industry participants.
“You are going to see more mergers and acquisitions take place during the year,” said Ahluwalia.
On the funding side, loans backed by banks are predicted to rise. Citing LendingClub, Ahluwalia noted that 49% of their loans are already bank funded. He believes this is a favorable trend, especially in a rising rate environment and increasing bank competition.
While platforms need to raise rates on borrowers to make investors “whole again,” competition is constraining the ability for originators to raise these rates. Regardless, the prospects for the asset class are positive;
“Overall, on a relative value basis the return on the asset class remains very attractive on a risk adjusted basis.”
Asked about the ability for online lenders to compete with these traditional lenders that are becoming more active in the online lending space, and Ahluwalia remains determinedly positive about pure online lenders and their ability to persist;
“A platform competes on risk management, customer experience, service and the relationship with the borrower. The second question for the platform is what market do you focus on. The big banks focus on super prime. They are not focusing on point of sale. They are not focusing on small business … American Express does not provide the best rate but they give you the best service. That is a good example.”
“Cost of capital will drive competitiveness and margin but there is room for players to compete.”
Since Ahluwalia sees consolidation, I asked if LendingClub will survive. The doyenne of US online lenders and the first to IPO, LendingClub has struggled in recent years – a challenge that is reflected in its share price.
“Yes,” said Ahluwalia responding the my question. “LendingClub has a ton of cash and credible operators from Blackrock (Patrick Dunne), Morgan Stanley (Val Kay), and PayPal (Steve Allocca). LendingClub is now making money on securitization and they have launched new revenue generating products and tools to improve underwriting and customer experience such as joint application. The most interesting product launch from the Lending Club investor day was the new Exchange Traded Product which improves the accessibility of the product to public investors, and also plays to LC’s retail brand. This is a differentiated product and open a new line of revenue for LendingClub.”
Commenting on the dramatic decline in LendingClub share price, Ahluwalia says public equity investors have not been kind to them. These investors struggle to understand the value delivered by online lenders.
“Is LendingClub a marketplace like eBay? Is it a technology company in the lending space like a LendingTree? Is a specialty finance company with technology?” asked Ahluwalia. “It may be that the broad promise and opportunity gets in the way of a simple message that markets understands. Also, although Lending Club took a concerted effort to communicate the story, markets are focused on near-term guidance and revenue. The open question is what are the appropriate comps and multiples for this type of businesses.”
“There were two phases. Focus and investment is stage one with new products and capabilities. The following year is all about growth. Management appears to be focused on building on the foundation in 2018, and setting the stage for growth in the following years.”
And what about Prosper? The other big name in the US marketplace lending sector. Ahluwalia had this to say;
“Prosper is interesting because they have a consortium committed to purchasing loans over a two-year period. The buying group is buying loans and funding with securitization. However, after the term of the period, Prosper must focus on finding on sourcing liquidity from another pool of buyers.”
Prosper has its challenges but it is still a private company. 2018 should be a telling year for the marketplace lending platform.
“The Prosper securitization program has improved and their capital markets leadership led by Usama Ashraf is strong. The operating model for Prosper and other lenders is sound – they can acquire borrowers, underwrite, service and distribute loans. If the liquidity risk issue can be addressed, and those concerns may not be fully addressed until we go thru a cycle, the open question is the enterprise value and appropriate comps for these types of businesses.”
And what about the impending entrance of big tech into Fintech? Everyone expects it and many of the big tech firms are already providing bank like services. Aren’t these companies the big winners in the end?
“Today, there is no regulatory framework that allows big tech firms such as Amazon to compete in the lending and payments space in a big way on a national scale. The OCC charter potentially opens up an avenue for those players to come in but this is still very early days.”
Big tech like Amazon, Facebook or Apple have a goldmine of deep data. Amazon may be leveraging their user information the best so far as they have already become a sizable online lender providing access to capital for SMEs. Simultaneously, Amazon is clearly preparing to enter the Insurtech world.
“Big Tech has significant customer advantages. Customer acquisition costs are close to zero. They have unique data on the behavior of their customers. They have strong brands and net promoter scores. They are cash flush and have access to capital. The missing link is the regulatory infrastructure and limitations that prevent commerce companies from operating as bank holding companies. If and when that gap is addressed, it would make sense for Big Tech to perform M&A to marry their advantages with the technology of the online lenders.”
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In many respects China has trail-blazed the path for US big techs showing how seamlessly financial services can integrate with commerce or other software services;
“All of the corporate strategy groups at the Big Tech firms are watching online lending and payments innovation in China and are developing their point of view.”
“The money market fund that was launched by AntFinancial. They take AliPay and sweep into AntFinancial. This is now the largest Money market fund in the world.”
So what are Ahluwalia’s big predictions for 2018: He believes the following items are poised to take place during the next 12 months;
- Substantial growth in Originations and ABS issuance.
- M&A consolidation.
- Constructive regulatory framework emerges
- A weakened CFPB enables a resurgence of 36% + lenders back into the market.
- Greater focus on Fintech
- US Department of Treasury is going to support Fintech
Regarding the big picture, and what needs to be done on a policy level for the US to remain competitive with Fintech, Ahluwalia says that public officials need to be more aware of what is happening in other centers of financial innovation;
“The US needs to focus on international competitiveness. We are seeing companies domicile in other countries where there are innovation friendly, capital formation friendly for Fintech. China, Singapore, Malaysia … they all have strong Fintech policies,” stated Ahluwalia. “The SEC and OCC and major regulators and policy makers agree [on this]. Hopefully we can start moving in the right direction. The US still offers the deepest most liquid and impressive capital markets in the world. But we cannot take this for granted.”
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