April 11, 2016
Alternate P2P lending firms such as Lending Club, Prosper and Social Finance who connect borrowers to investors through their technology platforms have been quite successful in the past. Investors have flooded these platforms with billions of dollars of credit. Last year, BlackRock bought $330 million worth of consumer credit through Prosper. There are a lot of opportunities for investors to invest their money into P2P lending. The yields tend to be pretty high compared to similar investment options.
These platforms face a unique problem as they see more curiosity from lenders than borrowers. As a result, Prosper had struck a partnership last year with companies such as Spirit Airlines, American HealthCare Lending and also acquired BillGuard. Last year, Lending Club brought a company similar to American HealthCare Lending for $140 million. Furthermore, to get access to more customers, FinTech lenders have also partnered with banks that pass on customers to these FinTech startups, especially those that banks don’t plan to service through their products.
The market landscape for FinTech lenders has not been the same since late last year. Earlier this year, Prosper had raised the borrowing rates for loans on its platform. The company raised lending rates by 1.4 percentage points on an average primarily due to increasing default rates and raising returns from other competitor products. Likewise, Lending Club had also revised its lending rates by 0.25 percentage points vowing to the Fed rate hike. Lending Club changes its rates often; however, in most cases, they bring down the rates to attract more customers. The rate hike last year seems to be in the opposite direction as it limits the number of borrowers on the platform, a problem they are already plagued with. Lending Club also has plans to increase the lending by 100 basis points the year to come.
Santander Bank, which held close to $1 billion of loans in Lending Club, sold the portfolio to JPMC early this year. A sneak peek into Santander’s fourth quarter report indicates that the firm reported a loss of $232 million on its unsecured personal loan portfolio, $123 million of which came from borrower defaults. As per an estimate, write-off rates at Lending Club had gone up to 8% while the forecasted rate were just half of it at about 4 to 5%. According to Orchard Platform, overall returns on online consumer loans have declined steadily over the past year and were at their lowest in December since early 2012. Investors are seeing better yields elsewhere, such as in high-yield corporate credits, as a result of a recent sell-off in those bonds.
As the institutional investors are turning away to attractive investments options, online lenders have started refocusing on small retail investors whom they initially started the P2P platform with. Prosper had a target of allocating 50% of its loan origination last year to retail investors and as a result, started breaking up loans into smaller pieces. However, the firm was not that successful and could only manage 8% of the loan origination to be sponsored by retail investors (during the first nine months of 2015). Lending Club, on the other hand, managed to fund 54% of the loans funded in the last quarter of 2015 from retail investors. As per an executive at Lending Club, Retail investors will continue to be a dependable source of capital especially in the event of an economic downturn. Accordingly, the firm is investing more in products, management and marketing resources into their retail capabilities. Prosper had hired 100 professionals across its sales and marketing function in 2015. As per the company’s annual report, the company has 115 employees in sales and marketing compared to 15 the previous year. Likewise, companies marketing expenses rose by nearly 168% over the previous year and stood at $ 112 million for the year 2015. Similarly, the marketing expense of Lending Club went up from $85.6 million in 2014 to $171.5 million in 2015. It is clear that the increase in marketing spending is to acquire retail investors, where the cost of investor acquisition is higher than an institutional investor. Lending Club has also made it public that the firm is spending a large proportion of its marketing budget on attracting investors and by contrast, has slowed its spending to attract borrowers.
From the following, it is clear that firms are planning to reduce the volume impacts by rebalancing supply and demand through pricing adjustments and continue to grow by bringing in investments from the retail community. However, an increase in interest rates may also lead to worse-off borrowers. The actual impact of the change in strategy is yet to be seen.