Online marketplaces emerged following the 2007-08 global financial crisis and have shown consistent growth since.
Lending Club’s success is an example of how borrowers and lenders alike are shifting away from traditional lenders, towards fintech and online financial services. In the nine years since inception, Lending Club has originated US$16 billion in loans. According to a recent survey by the US Federal Reserve, ‘As of early 2014, almost one in five small-business borrowers sought financing from an online lender’.
Let's say that again, out loud: One in five.
If that doesn’t speak to the potential for disruption, then disruption is all but a foregone conclusion. In the UK too, there is a similar trend. Today, UK based Funding Circle is already the third largest lender to the UK small business sector. Considering their competition comprises banks with hundreds of years of combined experience in lending, this is quite an achievement.
Lending Club Beats Earning Estimates
The world's largest listed lender announced Q4 and full year 2015 earnings earlier this month. Record results highlighted by all-time high loan originations, contribution margin, revenue, adjusted EBITDA and GAAP profitability.
- During 2015, LC facilitated US$8.4 billion in loans from 1.4 million customers and generated 7.8% return for platform investors.
- Loans originated in Q4 2015 totaled US$2.6 billion vs. US$1.41 billion for the same period last year, an increase of 82%.
- Operating revenues for the period reached US$134.5 million, an increase of 93% year-on-year.
- As a percent of loan originations, operating revenues were 5.21% up from 4.92% in the prior year. The rise was attributable to significant increases in all revenue components, partly offset by escalating costs. A surge in loan origination acted as a tailwind.
Quite unusual for a growth company was the announced share repurchase of up to US$150 million over the following 12 months. Renaud Laplanche, Lending Club's founder and CEO stated "We believe there is tremendous long term potential that is not reflected in Lending Club shares and so we are taking this opportunity to use a small portion of our cash to buy back up to $150 million worth of our stock."
Lending Club, by far a leader in the space acts as a bell weather. How it continues to grow reflects on the emerging industry and can impact future investment.
Don’t confuse growth with saturation
For several reasons, online lending is expected to grow. From a recent Morgan Stanley study, global marketplace lending may reach US$290 billion by 2020, with an expected compound annual growth rate of 51% From 2014-2020.
Anticipated growth in Individual loan Market: The market for personal loans will continue to grow rapidly as more consumers discover the benefits of installment loans, either as a way to refinance credit cards or to avoid charging their credit cards. A survey by Bankrate.com last month found an estimated 24 million Americans, or 10% of the adult U.S. population, expect to take out a personal loan in the next 12 months. That’s an attractive market for online lenders.
Gaining Trust of Individual Investors: Individual Investors are increasingly trusting of online marketplaces. As per Lending Club’s results, '...In 2015, 54% of the US$8.4 billion invested on our platform came from 115,000 individual investors. Pension funds, insurers and other asset managers contributed 21 percent...' These data show the trust that small investors and institutions alike have in online marketplaces.
A bright future but headwinds need to addressed
Lack of transparency continues to be a concern, as some online lenders charge hidden fees. To overcome this, a ‘Small Business Borrowers’ bill has been proposed in the US, specifying how lenders should charge customers and improve transparency.
A cash crunch is impeding the online lending industry's growth as the cost of borrowing grows, funds become increasingly scarce, with tighter Asset Backed Market (ABS) markets and other capital constraints. According to Dealogic, the ABS market issued US$40 billion in January — the lowest total since 2012. On the flip side, a greater number of institutional investors are entering the sector, attracted by the growth of the industry.
Adequate risk identification and assessment is a key contributor to future platform success. We highlighted the importance in a recent article.
And what of stress testing or the ability to withstand a recession. Almost all online lenders emerged in the wake of the global financial crisis, and haven't yet had to contend with such a market environment. Interestingly Lending Club did face the 2007-08 crisis, and delivered positive returns of 1.84% during that period, while the S&P 500 lost one third of its value during the same period.
Find out how to evolve traditional lending and deliver customer needs through online marketplaces. Our team has helped banks and other traditional lenders around the world fast-track plans and get ready to face the online opportunity.
Atul Tiwari, Grow Advisors
Top tier Investment bank executive and fintech enthusiast currently completing a Master of Finance with concentration in Financial Engineering.
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