Peer-to-Peer parties past talk of credit reckoning

In about a week the world's top online lenders will gather in New York for their third annual pep rally.

At the conference - LendIt USA - expect plenty of pounding dance music and talk of radical disruption of the banking industry, as executives from Lending Club, OnDeck Capital and Prosper rub shoulders with other wholesome-sounding upstarts such as Elevate, Orchard and Kabbage.

The online lending sector remains small - about $25bn in total assets across the US - but the top players feel that they are on the cusp of something great, crunching reams of data to supply instant credit to parts of the economy that the traditional banks are unable, or unwilling, to reach. Many are targeting millennials, most of whom say they would rather go to the dentist than drop in on Citi, Chase or Bank of America.

Yet if the mood is buoyant in the cavernous Marriott Marquis hotel in Times Square, over on Wall Street, things will probably be more subdued.

Shares in OnDeck, which raised $200m in a public offering in December, have struggled to keep pace with banking or technology benchmarks this year, off about 9 per cent. Lending Club, the sector heavyweight that raised $1bn days earlier, has done much worse, ranking in the 98th percentile of stocks on the MSCI mid-cap index.

Analysts are starting to talk about a moment of reckoning for an industry so new it has not yet settled on a name, with participants variously calling themselves peer-to-peer or marketplace lenders.

Should defaults start ticking up amid rising interest rates, or if regulators tighten their very loose grip, they say, then these tech-focused companies with their fancy algorithms could start to look different: bank-like stocks, with bank-like risks.

So far, credit conditions have been almost wholly benign.

SoFi, a private student lender aggressively expanding into mortgages for its mostly well-heeled client base, says that it has experienced two defaults from 25,000 customers - both after death.

CommonBond, another student lender eyeing other avenues such as home loans, personal loans and asset management, is yet to see a single one of its 2000 or so borrowers enter 30-day delinquency, more than a month late for a payment.

At some point, though, losses will build as the cycle turns. And as one senior executive at a big bank says, these unseasoned operators have no idea of how their portfolios will perform - and "no apparatus" to collect from bad debtors.

Meantime, given increasing competition for the better-quality borrowers, analysts are wondering how new lenders will protect margins.

The price of new loans to small businesses at OnDeck, for example, has fallen for eight straight quarters, notes Michael Tarkan, an analyst at Compass Point in Washington, tumbling from an average 66 per cent APR to 51 per cent thanks to undercutting by new entrants and "potentially looser underwriting standards."

And as they chase volumes, are new lenders mindful enough of the risk of fraud?

While some platforms such as Prosper do not take credit risk themselves, merely matching lenders with borrowers, they have to make investors whole if they facilitate loans to "criminal elements," as Morgan Stanley noted recently.

But executives often seem bemused when the question is put to them.

One told the FT last month that he'd love to discuss the ways in which his firm was guarding against identity theft - but was unable to, because he considered such measures a competitive advantage.

Finally, what happens when regulators start to pay closer attention? Until now, the two chief federal watchdogs - the Securities and Exchange Commission and the Consumer Financial Protection Bureau - have been sniffing elsewhere.

But as Mr Tarkan says, "regulatory focus tends to be drawn to both growth and headlines - two characteristics the marketplace lending industry has in spades".

At the very least, investors are surely right to wonder whether Lending Club of San Francisco, a nine-year old company with 843 employees, has really earned a market capitalisation that is about the same as America's bottom 400 listed banks put together.

[email protected]

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation