Marketplace lending RIP?

Once banks master financial technology, the marketplace lending industry is in deep trouble, Jean-Cedric Jollant believes. And the bad news is that’s starting to happen.

Mr. Jollant is senior product officer at Misys, a financial service software company with more than 2,000 customers worldwide. He spoke about FusionBanking CrowdLending, a fully integrated, white-label platform enabling banks to bring lenders together with borrowers of all sizes through the digitalizing of traditional lending. It allows banks to maintain their client base by finding products for customers they used to turn away.

That’s one reason why marketplace lenders need to be worried (more coming later). But they have some time as not all banks have embraced the new digital world, Mr. Jollant explained. There is a clear threshold between banks making the move from being a black or white, we-want-you-or-we-don’t-type of lender and those using new technology to reach those once ignored.

“The (fintech) challengers made the move by trying to build a hybrid model where they may not own 100 per cent, 50 per cent or even zero per cent of a loan, but the need the technology to do that,” Mr. Jollant said. “They need new underwriting material and servicing software which they don’t necessarily have.”

Misys provides the software so banks can become the marketplace, Mr. Jollant said. As more realize the benefits of that choice the marketplace lending industry as we know it will drastically change.

“We think that (the notion of) competing with banks is nonsense,” Mr. Jollant said.

Jean Cedric Jollant

Jean Cedric Jollant

Once more banks embrace new technology, they will be able to capitalize on a long list of advantages they have over marketplace lenders, Mr. Jollant said. Their abilities to process payments, service credit and onboard customers are superior. Close the technology gap and the banks can provide much better service at competitive rates.

Banks are starting to question the wisdom of referring potential customers elsewhere, a realization hastened by new regulations in the United Kingdom which made institutions who turned down loan applicants refer them to alternative lenders.

“What banks didn’t realize was this became an asset they were giving away,” Mr. Jollant said. “That’s our approach. We are saying you can keep these borrowers with different types of products by running that technology and enriching your lending portfolio.”

Prime borrowers may still be the tops, but banks can maintain the borrower relationship in different ways, Mr. Jollant said. Applicants denied for a loan with Chase can be referred to OnDeck. Other banks began partnering with marketplace lenders as early as 2014 while Goldman Sachs is taking it up a notch by completely eschewing the partnership model.

That leaves Goldman Sachs with two choices – buy or build, Mr. Jollant said. Buying a marketplace lender, even after the Lending Club snafu, wasn’t feasible due to high valuations, so that left them with the build option, which is also pricey to build, operate and maintain on what is often a patchwork foundation of technologies.  But if they employ syndicated technology, where the provider has multiple clients and can recoup their costs, then it becomes realistic.

Those valuations mask another problem for many marketplace lenders, Mr. Jollant said. Following the Lending Club crisis, originations declined as the industry questioned the transparency of the products. Many platforms have to seek repeated funding rounds to grow those originations, which is a completely unsustainable model, he added.

While originations have started to rebound, marketplace lenders are hardly the P2P model they started out as, Mr. Jollant said. They have essentially made themselves the intermediary between bank services and bank customers, so if those banks, who know their borrowers better and who offer a wider range of services can pick up their technological game, then they can nose out many fintechs, which a growing number of people in the industry believe will have to diversify if they are to continue growing.

“Our thinking is that if we replace the (marketplace) lenders and put that back into the bank where there is a really efficient model where everybody’s there – the KYC is done, the onboarding is done, the services are there…

“So (the marketplace lenders) are just intermediaries. Eventually they will not be able to compete with banks. The only difference between what the marketplace lenders are doing today and the banks really is the underwriting model and that gap will be breached really fast.”

Sample investor dashboard

Should (when?) regulation accelerate and platforms have to endure those costs, they will struggle, especially those needing to resort to external funding to maintain the loan pipeline, Mr. Jollant believes.

“That’s sustainable only to the extent where VCs are willing to spend the money. Basically you are not teaching a man to fish you are giving him a fish and that is not sustainable.”

Mr. Jollant believes the venture capital industry will soon begin to sour on marketplace lenders, possibly as soon as later this summer. Those surviving that will then have to withstand the next downturn, which many models have yet to be tested by.

“Once VCs realize there is no money to be made here and banks can compete with lower rates…”