In defense of online loans – TechCrunch

Corks have been flying among opponents of online lending in recent weeks. Fintech has been exposed as a pretender to the financial throne and “we hate to say we told you so!” has been the rallying cry of justified Luddites.

Renaud Laplanche at Lending Club, share prices fall at both Lending Club and OnDeck, job cuts at Prosper and Avant – all prompted by a general slowdown in institutional investor demand for market loans. If you follow the industry with even passing interest, you’d be hard pressed not to have heard him declared dead in the past fortnight.

The market industry will be fine. It is uncertainty – rather than a fundamental flaw in the business model – that is at the root of the current turmoil in the sector. There is uncertainty about the platforms’ internal monitoring processes, about the veracity of lending data, about changes in lending rates, about changes in the economy — and indeed about the platforms’ ability to cope. to these changes.

I could exhaust a thousand columns piecing together arguments about the sustainability of the online lending business model, but why bother? Some of the largest financial institutions in the world have saved me the trouble.

Alternative lending (I’ll use that term to encompass both the balance sheet and market varieties) is basically plugging excess liquidity directly into innovative sources of loan origination. The internet acts as a connector, facilitating a more seamless transmission of money.

It is thanks to the Internet that these assets can be opened up to a wide range of investors, ranging from thousands of individual investors to a smaller number of institutional investors. But beyond that, the internet also enables smarter pricing of risk.

These statements are backed up by the actions of some of the world’s best-known financial services brands, which have selectively embraced various aspects of the alternative lending model over the past few years.

Asset management 2.0?

Octopus Investments – the UK fund management platform which manages over £5.5bn of assets for more than 50,000 clients – entered the peer-to-peer lending business in April. The new platform is called Octopus Choice.

Octopus offers investors the opportunity to invest in a discretionary portfolio of asset-backed loans, originating from the company’s real estate lending business: Dragonfly Property Finance.

Dragonfly has a proven track record, having made nearly 3,500 loans worth almost £2bn since its launch in 2009 – with a loss rate of less than 0.1% to date. Octopus has proven underwriting processes and a high quality loan origination. It also has strong ties to the advisor community, and Octopus Choice has been tailor-made to fit the IFA market.

And yet Octopus, for all its advantages, sees strategic value in the peer-to-peer/marketplace lending model. This lends weight to the suggestion that an investment market – a technology-enabled market – is a more efficient way to access loan assets than has existed before. It also serves to reinforce the idea that the market’s investment model will be a sustainable innovation.

Downing’s actions add even more ballast to this notion. London-based specialist VCT and EIS – which manages over £700m in assets – launched a new crowdfunding platform in March. The platform’s first deal was a £3.2m solar bond with a one-year term, paying 6.25% per annum. Again, Downing enjoys a loyal following among financial advisers, but the lure of a market-based investment system has proven too strong to pass up. .

We know that Hargreaves Lansdown is preparing its own peer-to-peer lending operation, which is expected to arrive in the fall.

Blackstone Group – which manages more than $100 billion in real estate assets – has had a crack in the online lending space through its holding company B2R Holdings. The company acquired the domain name and had planned to launch an institution-only marketplace lending platform for small business and consumer loans. But that initiative was scrapped earlier this month, reportedly in response to the Lending Club debacle.

Yet, there is enough evidence here to suggest that the technology-driven market lending model is an innovation worthy not only of preservation, but also of imitation.

A better bank?


So far, we have mainly focused on the investor part of the online loan application. But the side facing the borrower is no less important. Online lenders are built around dynamic online portals that can process and fund applications in a fraction of the time available to incumbent lenders.

You will often hear the word “transparent” mentioned by online lenders when it comes to their application processes. The focus is on presenting as few barriers as possible to potential borrowers (with particular emphasis on limiting the amount of information that requires manual entry) and returning a decision as quickly as possible. The difficulty, of course, is making the right decision.

The world’s leading investment bank, Goldman Sachs, is actively preparing its own online lending business – codenamed Mosaic. Former Discover Financial man Harit Talwar leads the new venture and was immediately made a partner upon joining the firm (one of only around 400).

Mosaic will seek to issue personal and small business loans in the range of $15-20,000. These loans will not be funded by a pool of retail and institutional money. Instead, the book will be funded directly by Goldman’s New York state-chartered banking subsidiary, which came into being in the aftermath of the 2008 financial crisis, when Goldman became a bank holding company. This company held $128 billion in assets as of June last year.

Goldman has the loan capital part of the equation in hand and has recognized that the online “platform” represents the most efficient method of distributing that capital to borrowers.

The comments of Managing Director Lloyd Blankfein and Chief Operating Officer Gary Cohn upon hiring Mr. Talwar are indicative:

“The traditional ways in which financial services are delivered to consumers and small businesses are being fundamentally reshaped by advances in technology, the maturity of digital channels, the use of data and analytics, and the emphasis on client experience.”

As the Goldman pair mentioned above, the value of operating an online lending platform goes beyond the benefits of improved delivery – it’s also about “the use of data and analytics”, particularly with regard to credit assessment.


The recent combination of JP Morgan Chase and OnDeck is perhaps the best example of the value an online lending platform can offer to the traditional underwriting process. Chase began offering loans to its nearly 4 million small business customers partnered with OnDeck in January of this year. The money comes from Chase’s balance sheet and the loans are branded Chase, with the OnDeck platform taking on a kind of behind-the-scenes white-label role.

The Wall Street Journal, in an article titled Inside JP Morgan’s deal with OnDeck Capital, said the partnership would be “Help the bank process requests more cheaply and quickly, in hours instead of weeks”. There you have the delivery element.

The article goes on to explain that OnDeck will collect fees for issuing and processing loans of up to $250,000 on Chase’s behalf – loans that have been “Previously considered too small to move the needle to the big bank”. OnDeck has made lending to businesses in this market segment economically viable through the use of cutting-edge technology. JP Morgan is trying to capture a measure of this success for itself.

Kabbage has struck a pair of similar partnerships with Santander in the UK and with ING in Spain. Again, the Kabbage platform is the catalyst – both for delivery and subscription purposes. Santander and ING are the muscle.

Germany’s Commerzbank is the only bank we know of that is trying to launch online lending equipment of its own design, rather than just borrowing from upstarts. Commerzbank’s peer-to-peer lending platform – rumored to be called “Main Funders” – is expected to arrive in the first half of 2016, according to

But let’s get back to the basic definition of what an online lender is. It is a machine that matches excess liquidity to loan assets, while providing a view of the risk of those assets. It has two or three elements: the investor-oriented market, the interface with the borrower and the credit engine.

Over the past 12 months or more, we’ve seen each of these components embraced by major financial services institutions – the kind of institutions that have likely been singled out by cynics seeking to juxtapose the shortcomings of the online lending industry. The question then becomes: if the model components are not broken, what is wrong with the model?

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David A. Albanese