Online Lending in Risk On Mode: Unprecedented 21 Months of Non Stop Securitization Issuance

PeerIQ has just published their quarterly marketplace lending securitization tracker. The periodic report gauges activity in the online lending sector providing an interesting barometer of industry sentiment and investor activity.

The most recent report stated that PeerIQ has observed an “unprecedented 21 months of non-stop issuance. Markets remain in a “risk-on” mode and MPL investor appetite continues to grow. This is a very bullish statement for online lenders coming at a time when interest rates are rising as is competition in the sector is increasing. During Q1, securitization hit $4.3 billion – a 34% increase year over year and the second highest quarter ever.

CI hopped on the phone for a quick call with founder and CEO Ram Ahluwalia and PeerIQ Head of Research Ashish Dole. The activity in the ABS market was described as pretty incredible;

“It would have to be pre-crisis when we last saw this type of activity,” said Dole. “It is extremely interesting with a new asset class. The market is getting more comfortable with this type of asset. “Also the ratings agencies are continuing to revisit their ratings and a lot of [51 student and 33 consumer] have have seen their ratings upgraded.”

During the quarter, SoFi issued the largest consumer and student deals ever seen in the marketplace lending space. SoFi continues to increase deal sizes every quarter after quarter.

SoFi is leading the way for students and consumer lending, according to PeerIQ. SoFi has built a “customer acquisition machine.” SoFi has done an excellent job of leveraging the employer channel positioning their offerings as an employee benefit. This has been the surprise winner. But it is not just the employer network. Direct mail has been very reliable and mass market promotion has been doing very well too.

[clickToTweet tweet=”SoFi has built a ‘customer acquisition machine.’ SoFi has done an excellent job of leveraging the employer channel positioning their offerings as an employee benefit #OnlineLending #FIntech @PeerIQNews” quote=”SoFi has built a ‘customer acquisition machine.’ SoFi has done an excellent job of leveraging the employer channel positioning their offerings as an employee benefit #OnlineLending #FIntech @PeerIQNews”]

Ahluwalia and Dole said that traditional financial players are entering the market in a couple of different strata. There are the large money center banks that are building out their lending capabilities with some partnering with tech companies. Then you have the regional banks.

All of these banks are waving their origination fees which is putting pressure on the revenue model of Fintechs.

As for Fintechs, they are responding by creating new types of products and deepening their relationship with the borrowers. LendingClub was mentioned with their new exchange traded product. New market entrant Upgrade should join in the ABS ride.

And what about big tech and their turbo charged data points and low cost of customer acquisition? Will big tech challenge both established Fintech and traditional finance with better, faster, cheaper models?

“You are seeing big tech recognize the lending opportunity,” said Ahluwalia. “They are partnering in cases where they lack a regulatory swim lane. Amazon is partnering with banks on small business credit cards. In other areas they are going after it directly. For example, there are rumors that Amazon is launching a non-bank commercial mortgage lender.”

What about risk?

There is the potential for an error in interest rate policy. The Fed is walking a fine line of maintaining growth while keeping inflation in check. Too much, or too little, one way of the other, could sideline the economy. Smooth sailing so far – though. But the added twist of global trade disruption and the never ending debate on byzantine regulation may deliver a volatile credit model during 2018.

As for big tech (or even Fintech’s) the problem remains the same.

“What they lack is a regulatory framework which to compete nationally,” said Ahluwalia.

That’s a problem that is not going away anytime soon unless Congress acts. Good luck with that.

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