By Julie Stackhouse, Executive Vice President
This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, appears at least once each month.
This blog post is the third in a series about fintech and how it is affecting the banking industry. Last month, we looked at artificial intelligence and machine learning. This month, we examine what we are terming “technology-enabled lending.”
Technology-enabled lending—frequently dubbed marketplace lending—has branched far beyond its initial beginnings as person-to-person (or P2P) lending. Whereas P2P lending featured individual investors financing loans to consumers, marketplace lending is much broader. It includes multiple types of financial, nonfinancial and institutional lenders and also investors such as hedge funds.
These lenders leverage data analytic techniques (such as machine learning) and mine massive amounts of data (so-called “big data”) to underwrite loans.The emergence of both cloud and high-speed computing has also been a boon to technology-enabled lending. According to data cited by the Treasury Department, this sector has grown from infancy in 2006 to $26 billion in loan originations in 2017. One analyst has predicted loan origination volume will hit $90 billion by 2020. “Marketplace Lending: Fintech in Consumer and Small-Business Lending (PDF)”. Congressional Research Service, Sept. 4, 2018. Despite growth in this market, it’s important to note that marketplace loans outstanding represent less than 1% of the total consumer and small business loan market.
There are two common models for marketplace lenders: direct lenders and platform lenders.
Direct lenders—which are also known as balance sheet lenders—use funds (capital) generated from outside sources to originate loans. Most of these loans are kept on the lender’s books after origination. Some of the more well-known direct lenders include CAN Capital, Kabbage and SoFi.
Platform lenders, on the other hand, partner with depository institutions to originate loans that are then purchased by the lender or by an investor using the platform. LendingClub, Prosper and Upstart are prominent examples of platform lenders.
Some lenders cater to one type of borrower (such as small businesses), while others provide a variety of products such as small personal loans and mortgages to consumers, as well as lines of credit, fixed-term loans and cash advances to businesses.
Marketplace loans start with an online application filled out by a prospective borrower. While underwriting may consist of conventional checks such as credit scores, income and debt repayment history, it might also be based on less traditional data such as monthly cash flow and expenses, educational history, payment and sales history, and online customer reviews.
Banks—while competitors with some marketplace lenders—have played an important role in the growth of this market by:
Whether acting as a partner or a facilitator, banks benefit from the technology-enabled lending. Properly conducted, consumers and small business borrowers benefit from the ease and convenience of technology.
Bank participation in this area carries a number of risks, some of which are inherent to banking and thus familiar, and some that are new. These risks include:
Technology-enabled lending is growing. The pace of future growth will depend on the demands of consumers and small businesses for convenience and speed. While technology-enabled lending is promising, its risks to the consumer and small business must be properly managed.
1 The emergence of both cloud and high-speed computing has also been a boon to technology-enabled lending.
2 “Marketplace Lending: Fintech in Consumer and Small-Business Lending (PDF)”. Congressional Research Service, Sept. 4, 2018. Despite growth in this market, it’s important to note that marketplace loans outstanding represent less than 1% of the total consumer and small business loan market.