It’s clear that equity investors no longer see the value of marketplace lenders, such as companies that provide credit at the point of sale or online lending.
Indeed, current valuations are more in line with traditional lenders and do not take into account the inherent advantages of these new marketplaces. The question on the industry’s mind is if these valuations are the new normal. Is there still value in the fintech lending category?
My answer is a resounding yes. Marketplace lending as a category will change the future of lending and is still a compelling investment opportunity.
A typical lender leverages equity into debt at a fixed ratio. If they want to grow their portfolio they have to raise equity and lever it into more debt. An off-balance-sheet marketplace eliminates the equity-debt leverage ratio allowing a lender to double and triple their portfolio as quickly as they can grow their marketplace.
Financial institutions understand the value of loan syndication and large loans are regularly parceled out among multiple banks to share risk. A marketplace automates syndication and thus risk diversification for loans of any size with no incremental cost.
Online lenders build a seamless customer journey from screening to underwriting to origination to servicing to funding. Traditional institutions are fragmented and inefficient; data is held in disparate systems making it tough to manage and monitor client activity. Consumers and businesses value a better lending experience, which is what new marketplace lenders can deliver.
In lending, most of the time is spent in underwriting. For banks, underwriting is human capital intense and one of the big reasons they shy away from consumer and small-business lending. Marketplace lenders, however, have changed the game by focusing on automating data collection, streamlining decision-making and leveraging the latest technologies to make credit decisions.
Lending as we know it today is going to change. We don't know exactly how, but I am certain that it will. To write off marketplace lenders because of a tough two years is shortsighted given they have approached an old industry in a brand-new way.
Here is what I think will show that a technology lender has fundamental advantages that translate to long-term value:
Time. Marketplace lending has existed for 10 years and only been a significant category since 2012. Lending has been done in a certain way for a long time, it's going to take a while for the advantages of this new model to prove out.
Data. Data is increasing at an exponential rate, but we don’t have enough history to definitively prove that all this new data will change tried and tested credit models in all categories of lending.
Demographics. Millennials have very different expectations of financial institutions. The lenders that win will be the ones that are able to innovate and adjust to the demands of a changing population.
Based on this, I think traditional financial institutions are going to rely on marketplace lenders and associated fintech companies to remain competitive. Ultimately, this is what will drive exit and high valuation opportunities.