Is Alternative Lending Terminally Ill?

© Can Stock Photo Inc. / mrorange002Tremors are running through the alternative lending space.

Prosper raised rates, cut staff, and saw a chilly reception from investors for its latest securitization. OnDeck saw shares slide to 30% of their IPO value. Avant called off several new product launches and also cut staff. Perhaps most ominously, Lending Club CEO Renaud Laplanche suddenly stepped down when the company went overboard to push loan sales, possibly in response to Wall Street pressure.

These companies are some of the leaders in the alternative lending, so is all this news a sign of dark days ahead? Not necessarily.

“It’s actually a sign of maturity,” LendKey CEO Vince Passione said. “All industries go through this.” But Passione noted that recent news should lead to a re-examination of the term “alternative lending” and more broadly, the word “fintech.”

“True fintech means building technology and software for banks — their customer is the bank,” Passione said. “Alternative lenders stepped in to fill a void and brought access and speed to the borrowing process,” but they are not “fintech” companies. (His own company, LendKey, serves banks and credit unions exclusively and so fits his definition of fintech.)

Companies such as SoFi and CommonBond, for example, are what used to be called specialty finance companies, Passione said. And the others, “should just be ‘lenders,'” Passione said. “I hope the smoke clears on fintech vs. lenders in the next few years. There are over 400 platforms out there, and it’s probably about 350 too many. There’s an old saying, ‘It’s easy to lend people money. What’s hard is to get them to pay you back.'”

Matt Harris, managing director at Bain Capital Ventures and longtime fintech investor, agreed alternative lenders need to embrace lending.

“The issue with Lending Club is one where they spent so much time trying to tell the world that they’re not a lender,” he said. “There’s this party line of, ‘Oh, no, we’re a marketplace.'”

Lending Club sells its loans to others after origination.

“It’s not that surprising they had a compliance issue,” Harris said. “They didn’t put in all the bells and whistles for compliance, but still, this is a foot fault more than a systemic issue.”

Harris pointed out that Lending Club’s board is strong and sound and made the best of the bad choices available to them. It’s not out of the ordinary for founders to move on after companies mature, Harris said, but the way Laplanche stepped down so suddenly was “unusual and dramatic.” It’s not common to be a founder who can also run a large company, Harris said, but for years Laplanche appeared to be just that.

“In Q1 there was a liquidity crisis that rippled through the industry,” Harris said. “It started in 2015 when hedge funds got more conservative. Then the re-rating of Prosper freaked everyone out and for ten days no one bought anything. This may have led to Lending Club worrying about originations and that led to the problem — a a kind of funny knock-on effect of Prosper.”

Bain is not an investor in Lending Club.

But Harris, who at one point was chairman of OnDeck Capital, another marketplace lender, emphasized that the most serious sign of trouble has yet to appear: a decline in credit quality. The leaders in alternative lending — Avant, OnDeck, SoFi — will all be fine, to varying degrees, Harris said. Lower tiers may not be so lucky. But overall the industry is not showing serious cracks yet.

“What you’re not seeing are actual credit issues,” Harris said. “I’m not a Pollyanna about this industry, which I think faces real challenges. But they’re still originating high-quality loans at scale. They need to maintain liquidity and keep in compliance, but they’re doing their jobs.”

To sweeten the pot for investors in future, Lending Club may need to offer equity, Harris said. “They may continue to have liquidity problems, they may suffer dilution, but none of it is terminal.”

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