Survive and Accelerate: Marketplace lenders’ varied paths to the next growth stage post-Coronavirus

Rising unemployment, small business failures, and impending recession pose an existential threat to marketplace lenders who take risks to accurately identify creditworthy borrowers underserved by traditional financial institutions. Within weeks of lockdowns that swept across the globe in March, LendingClub laid off 30% of its staff, Kabbage stopped small business loans, and more than sixteen lending platforms across Asia-Pacific laid off staff and took dramatic measures to cut costs. The response to coronavirus has been rapid and dire, but how marketplace lenders choose to handle the pandemic will determine who the winners and losers are in the sector.

So then, what are marketplace lenders to do to survive and move on to the next growth stage?

Expanding business through partnerships with banks and other fintechs

Leading marketplace lending players are busy riding the M&A tide to diversify their revenue sources and accelerate growth. LendingClub acquired Radius Bancorp, an online bank, to seek a bank charter to directly fund loans and offer more financial services. SoFi purchased Galileo, a payment software company, to expand its product range to cover investments, wealth management, payments, and securities. Metro Bank and Ratesetter are in early stage talks for a M&A deal. 

Previously, many of the partnerships were in the form of collaboration between banks and lenders in order to originate loans together. For instance, Web Bank partnered with lenders like LendingClub, Prosper, and Avant to issue loans. Cross River Bank did the same and partnered with lenders such as Affirm, Upstart, and Upgrade. Celtic Bank works with Kabbage, Square Capital, and On Deck to issue small business loans. The number and types of partnerships have rapidly increased over the past decade because the relationship is mutually beneficial.

The surge of acquisitions and partnerships makes one thing clear: marketplace lenders no longer are fixated on just lending. They want diversified revenue sources, lower-risk business models, and accelerated growth.

Focusing on data analytics and agile screening

The rapid spread of Coronavirus in early 2020 forced marketplace lenders to quickly reevaluate their business strategies and lending standards. Instead of forging completely new paths, some marketplace lenders have chosen to focus on upgrading their core technologies. 

PeopleFund, Korea’s leading marketplace lender focused on consumer finance, has set up measures to minimize exposure to risk and react fast to the pandemic. From the start, PeopleFund has focused on issuing loans to near-prime borrowers who have the ability to pay back loans, but have not been served by traditional banks. In response to the pandemic, PeopleFund systematically strengthened the screening criteria for borrowers using industry performance indexes and data on regional confirmed coronavirus cases made available by the Korean government. The speed and agility with which it has been able to analyze the mass data coming from the surge in loan applications is something that traditional banks cannot replicate. PeopleFund has remained largely resilient to the impact of the pandemic, recording 121 million dollar in loans in the first quarter of 2020, which is a 101% YoY increase while still maintaining a 0.9% default rate for its unsecured personal loans which is a remarkable level on par with traditional banks.

More than at any point in time, creative data analysis and screening using advanced technology are necessary to maintain healthy loan books . Upstart, the lending platform started by LendingClub’s founder and former CEO, released a new AI-powered credit decision API for banks in May. Even during the pandemic, their model seems to be holding up and their credit decision API offering will allow more traditional financial institutions to leverage their expertise into their existing business.

Securing a bank license

Zopa, the U.K.’s oldest marketplace lender, was recently awarded a banking license. Instead of acquiring an existing bank, this strategy allows Zopa to grow entirely by itself. This was the first success case for a marketplace lender to secure a bank license. The expected benefits from the new license include a more stable way to fund loans and expansion of services for its users such as a fixed-term savings account and credit card. 

There are many regulatory hurdles to pass in order to obtain a bank license like Zopa, however, this strategy is something many fintech companies around the world are trying to pursue. Revolut in the U.K., Square in the U.S., and Toss in Korea are all examples of fintech companies securing a bank license to expand product offerings and compete head on with traditional banks.

The Future of Marketplace Lending

The shock brought on by Coronavirus is unprecedented and has served as a catalyst for marketplace lenders to respond fast and implement new strategies. Since the inception of marketplace lending, primary investor concern was that these new players never experienced a full economic cycle, which other traditional financial institutions have weathered time and time again. The pandemic has sped up the urgency for marketplace lenders to prove their capability to screen out bad borrowers and move nimbly during this difficult time of market uncertainty. Those left standing will be able to prove their real worth to investors and may even be better positioned to challenge incumbent banks.

Ultimately what will drive growth is a virtuous cycle where the marketplace lending winners will get more capital and credibility which will then attract more borrowers to the platform. The higher demand for loans will increase the need for investments from lenders. So on and so forth. The top players will then surely be able to scale up and drive the next growth stage which will likely include industry consolidation.