Online marketplace lending is booming. Online lender Prosper recently closed a $50 million round of funding. While there is no authoritative value for the global online marketplace lending industry, the U.S. Treasury is interested enough in the sector to have released a comprehensive white paper in June of 2017. Like any growing industry, there are opportunities and challenges that companies and investors will need to deal with. Below are some of the biggest of these opportunities and challenges.
Opportunity: Bank Partnerships
The online marketplace lending sector currently consists almost entirely of fintech firms. Banks have finally awakened to the threat that fintech firms could pose to their future business. However, one of the best opportunities for banks and fintech firms remains partnerships with each other.
Because banks have relationships of trust with millions of consumers, as well as the physical infrastructure to serve those clients, it makes sense that online marketplace lenders would want to partner with banks to help them better serve their clients. These partnerships would see fintech companies making their technology available to bank customers in a mutually beneficial relationship.
Challenge: Intense Competition
One the biggest challenges in online marketplace lending is the intense level of competition. While right now traditional banks have been wary of entering this spaces, it is already crowded with a variety of firms. Not only is competition heating up for big firms like Prosper and Lending Club, but also every week sees the launch of some new niche online lending platform like LendingKarma, which focuses on people lending money to friends and family.
Major brick and mortar institutions like Goldman Sachs, are likely to soon also be competitors in this space with either their own offerings or as partners of existing fintech firms.
Opportunity: Transparency
The power of data driven algorithms is that it is now easier than ever for borrowers to understand what they need to do to qualify for a loan. Online lending marketplaces have an opportunity to turn transparency into a competitive advantage.
For most borrowers using online lending platforms, banks are not only slow they are also opaque. Borrowers feel like they don’t know why some people get loans and others are declined. But, online the decisions are made fast and they are made for specific reasons. The transparency of an online lending marketplace makes borrowers feel like they were treated fairly, even when they don’t get a loan.
Challenge: Uncertain Regulatory Environment
Many world governments have expressed concerns about the rapid growth of online lending marketplaces. These fintech companies are not banks. While that limits what services they are able to offer, it also means they are subject to fewer regulations and less oversight.
Some central banks and finance ministers worry that peer to peer lending and online lending marketplaces could grow so big as to pose a threat to the global economic system should this sector experience a crash.
There is a lot of discussion in the U.S. and other countries about what kinds of regulations are appropriate for this sector. Until actual regulations are proposed and enacted, this industry will need to deal with a level of regulatory uncertainty.
Despite the challenges facing online lending marketplaces, there is no end in sight to the rapid growth the industry has seen all over the world. As firms seize these opportunities and meet these challenges, new investment opportunities will open up to investors all over the world.
By Jason McBride
