Poor credit scores are not the only reason loan applications are denied. Increasingly, lender niche-bias can be blamed for the giant red ‘X’ stamp on you paperwork.
Snehal Fulzele is the CEO of Cloud Lending Solutions, a global cloud infrastructure company offering SaaS applications designed to manage loan portfolios and help platforms quickly get to market.
Mr. Fulzele said the idea for the CL Exchange began with a conversation he had with Ron Suber from Prosper. Mr. Suber said Prosper accepts roughly 10 percent of credit applications it receives. For other lenders it may actually be lower.
The problem is not applicant credit worthiness in many cases, Mr. Fulzele explained. Many people with specific needs first approach a lender who has established different operating parameters. Some may need less than the lender’s minimum loan. In Prosper’s case they will not lend to someone with a FICO score below 660.
A member of Cloud Lending Solutions board was turned down for a loan despite having a FICO score north of 800. The problem was he did not fit in the specific niche that lender operated in, Mr. Fulzele said.
The lenders know this is an industry-wide inefficiency, Mr. Fulzele admitted. So he set out to establish an online marketplace where participating platforms could share and exchange loans that match each other’s unique lending criteria.
In a sense Mr. Fulzele is building on agreements which already exist between loan providers in different spheres. For example, Prosper, which facilitates consumer loans, will send small business borrowers to OnDeck, who reciprocates by sending consumer applicants to Prosper.
Mr. Fulzele envisions CL Exchange operating in a similar fashion but with more platforms involved.
CL Exchange is currently in private beta testing with five platforms. Each platform operates in a different vertical, Mr. Fulzele explained.
When a platform refers a borrower to another CL Exchange participant they receive a referral fee, Mr. Fulzele said.
It was easy to get companies to sign on, Mr. Fulzele said, while adding it helps reduce customer acquisition costs.
“Because we are speaking to an industry-wide problem, the platforms see value in partnering,” he explained. “Platforms spend money to attract qualified borrowers. Through the exchange they can do it for a fraction of the cost.”
Cloud Lending Solutions develops the technology and infrastructure for lender back-office applications so they can underwrite, service and collect the loans they originate.
Mr. Fulzele explained the old banking systems are built on 30-year-old inflexible solutions. As competition for borrowers increases, it becomes more important to have a system which can vet and underwrite applications within a competitive time frame, he added. Because those older systems are so rigid, it takes plenty of both time and money to make them current.
Time to market is crucial, Mr. Fulzele said, and by creating the general infrastructure, which can be as much as 80 percent of a platform’s technology, it allows the individual platforms to concentrate on their “secret sauce” – their unique credit risk assessment models.
Mr. Fulzele said it is an exciting time in marketplace lending because of the many different ways platforms can approach risk assessment. Some only use FICO scores, while others use social data.
“Each one is unique,” he acknowledged. “It is a differentiating factor for newer models.”
Platforms typically approach Cloud Lending Solutions when they are about to scale, Mr. Fulzele explained. Up to that point many were doing it manually in-house.
Cloud Lending Solutions now works with 70 lenders in 18 different countries, Mr. Fulzele said. As they become well known in the industry, platforms are approaching them sooner in their development, often when they are just starting out.
Despite the surge in interest with marketplace lending, their is plenty of room for growth, Mr. Fulzele said. Roughly one percent of lending is facilitated through this method, a figure he expects to grow to six percent within five years.
“That will have a profound effect on the entire lending industry, especially the incumbents,” Mr. Fulzele predicted.
Those incumbents stopped lending after 2008, leaving the door open for the marketplace lenders, he said.
The new entrants have eliminated the major pain point of approval delays, and have established clear price, convenience and customer service advantages.
Now the establishment wants back in, and finding it hard to compete are establishing partnerships, like in the case of Citigroup and Lending Club, or are looking to establish their own platforms a la Goldman Sachs.
“It is fascinating for banks to see how Lending Club can now service these loans in a profitable manner,” Mr. Fulzele observed. “There is a culture shift where banks are being forced to behave like startups, whereas incumbents like to move slowly.”
Most big banks have innovation arms charged with helping them tap into these new areas, Mr. Fulzele said. For example Goldman Sachs’ strategy group came up with the idea to create a marketplace lending platform.
Mr. Fulzele said the United States has a very fragmented lending market featuring more than 25,000 non-bank lenders. There should be some consolidation of the peer-to-peer space at some point, he suggested.
The ones who thrive will be differentiated by the quality of their underwriting, he said. With most platforms being at most three to five years old, existing data is not enough to measure how solid their underwriting techniques are yet.
The jury is still out on the effectiveness of using social media data points, he believes.
Look to China, where more than 1,000 P2Ps are operating, Mr. Fulzele said. Many of those will disappear because of poor underwriting standards.
“You have to know your borrowers’ behavior,” Mr. Fulzele explained. “Can they pay in a timely fashion without defaulting?”
“The combination of technology and background experience is more likely to be a successful one.”
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