It was but one of 70 demos, but it said something more profound than all the offerings at last week’s FinovateFall in New York.
The demo was from Ldger. You are forgiven if you didn’t notice it after seeing the few dozen other demos before Ldger’s founders finally made it to the stage.
Why was Ldger more significant than the other 69 demos? Because Ldger offered hard and fast proof that marketplace lending volumes are going to go up. Way up.
First, a bit of history. Back in the mid 1990s, Wall Street got the bright idea that principles behind mortgage-backed securities could be applied to other asset classes, like auto loans or credit card debt. This innovation caused billions of investor dollars to pour into these once-sleepy corners of the consumer finance business. This didn’t just grow these assets — it supersized them. Subprime auto finance, for example, went from fringe to a class of publicly traded companies. In many ways, the asset-backed securitization market planted the seeds for the credit crisis. Yes, that credit crisis.
Which brings us to Ldger. Whether Ldger itself will or will not unicorn is beside the point. What is the point is that it proposes a massive increase in capital for marketplace lending. That’s because at its core Ldger is aiming to create a secondary market for marketplace lending that has less friction than even the ABS market today, and by “less friction” we mean lower costs and wider distribution of securities. The company explains its service as:
[A] platform that permits investors in and originators of marketplace-originated credit to build and market customized tranches of risk exposure against marketplace credit cashflows.
In other words, this is a build-your-own securitization service (“securitization-as-a-service,” if you will), and that is just eye-popping, when you consider what happened to asset classes like auto loans and credit cards after their mid-1990s capital boom. Even if Ldger itself doesn’t make marketplace securities more common, some company will. Last quarter, Lending Club generated around $226 million of revenue. That’s not even a securitization worth of revenue. Investors will demand securitizations of $1 billion-plus, and they will look to marketplace lenders to generate such volume. When there is capital, there is volume. That’s an axiom of Wall Street that will never change.
And that is why marketplace lending will boom into what I think will be the range of $30 billion to $60 billion range of total annual securitizations, which will represent about 50% of total origination volume. Bank Innovation has no model to back this up, so don’t ask for one. But we are looking objectively at volumes today for marketplace lending and consumer credit, and how a Ldger could boost securitization volume and demand — and, thereby, capital inflows to marketplace lending. There are originations in them thar hills.