Online marketplace lending is exploding in popularity among consumers and investors all over the world. This sector only got its start in 2005 with a few daring European firms. Today, the global value of this industry exceeds $180 billion, and is expected to shortly top $200 billion.
But, with all of this growth there has also been a spike in myths and misconceptions about online marketplace lending. Here are five of the biggest misconceptions and the real truth about these myths.
1. Online Marketplace Lending is Harming Banks
Many observers believe that the growth of online marketplace lending is coming at the expense of traditional banks. However, while this industry is disrupting the way loans are delivered to consumers, the most profitable fintech firms in this sector are actually partnering with banks. These partnerships are helping banks provide better service and are allowing the fintech firms to have a physical presence they would never be able to afford.
2. Online Lending Marketplaces Will Fail During an Economic Downturn
Newcomers to the world of online marketplace lending loudly predict that when the next economic downturn happens these new fintech companies will be buried in bad debt and defaulted loans. They argue that this industry has never faced a severe downturn. However this ignores recent history. Online lending giant Lending Club was founded right before the Great Recession and managed to grow throughout the economic chaos. And, Lending Club isn’t the only one. The truth is many companies have already experienced a downturn and they not only survived, but they thrived.
3. Online Lending Marketplaces Make Risky Loans and Investments
Many people believe that online marketplace lenders make riskier loans and have looser underwriting standards. Some also believe that these firms take their profits and make unduly risky investments that could threaten the financial health of the companies in a recession. However, online lenders use sophisticated algorithms, data mining, and AI powered platforms to make smarter lending decisions faster. These firms are making different kinds of loans than traditional banks. Most firms are making solid investments in research and technology partners that will strengthen them for years to come.
4. Online Lending is Only for People With Bad Credit
One of the biggest misconceptions is that only people with bad credit are seeking online loans. They believe that online lending marketplaces represent a huge risk pool. But, the data doesn’t support this claim. The biggest reason people choose online lending platforms over a traditional bank isn’t a lack of creditworthiness. It’s convenience. Online platforms provide a better customer experience. The actual creditworthiness of the average online borrower compares favorably with brick and mortar bank borrowers.
5. Online Lending is a Dangerous, Unregulated Jungle
Politicians and pundits love to claim that online lending marketplaces are not regulated and therefore are poised to become predatory. But, while online lenders are not chartered banks, in every major country they are subject to a host of financial regulations that cover everything from capitalization to interest rates. One only has to look at China and the United States to see that regulators are paying attention and carefully monitoring online marketplace lenders.