It wasn’t long ago that headlines trumpeted the emergence of peer-to-peer marketplace lending as a radical threat to traditional lending institutions. We’ve all read how nimble startups, with roots closer to Silicon Valley than traditional banking, would streamline loan originations, improve credit underwriting, and create investment vehicles that would render stodgy, old-school banks obsolete.
More recent coverage, however, indicates that the red-hot marketplace lending sector may be cooling a bit. There are signs investor interest in the sector may be slowing. Some players have been racked by management upheaval. In addition, as the segment attempts to gain critical mass, regulators are beginning to give it greater scrutiny.
Let’s take a moment and reflect on the actual product that is most often being offered by marketplace lenders: the personal installment loan.
Citibank (then the National City Bank of New York) was the first to introduce the personal loan product, in 1923. The press lambasted the bank for lowering itself to the status of a pawnbroker … yet the personal loan prevailed and eventually was considered a breakthrough for consumers.
Among the biggest changes over the next 93 years came by way of fair-lending statutes, which were welcome developments. Then credit scoring came along, which enhanced the product and enabled automated underwriting, further expanding access and more efficient delivery.
The most recent development, dubbed FinTech, aims to further streamline the front end of the lending process. It has not, however, fundamentally changed the profile of the product. Installment loans are still subject to funding risks, credit risks, investor risk, regulatory oversight of fair-lending practices, collection strategies, etc.
These developments don’t invalidate the marketplace-lending approach or suggest that traditional lenders can’t learn from these innovative new players. They merely remind us that the fundamentals of the lending business don’t change simply with the advent of new technologies. Innovations may bring new efficiencies and improve customer service, but it’s still essential to assess risk accurately and manage it carefully, to establish and maintain sufficient reserves, to manage portfolios prudently, and to operate with the kind of transparency that earns and preserves the public’s trust.
Innovation, adaptation and competition can and must continue to ensure our consumer lending industry remains vibrant and resilient. We are proud to be an integral part of this innovation and increased competition, which benefit consumers. But the basic rules of lending and being repaid on time still apply. That may mean our progress will be more evolutionary than revolutionary. But what’s important is to keep moving forward, so lenders continue to gain efficiencies, while expanding qualified consumers’ fair access to credit.
All the best,