“Alternative lending is dead,” said Rob Frohwein, co-founder and CEO of Kabbage, “but not because of the hiccups that have occurred in the industry.”
LendingClub was the first of those hiccups this year. These hiccups have left some investors wondering whether the promise of alternative lending – wider access to capital, less burdensome application processes, all possible through the harnessing of technology – had faded in 2016.
Disclosure: I personally invest in Lending Club loans and serve as publisher of Fit Small Business, which has financial relationships with several of the companies mentioned in this article.
During the year, Lending Club had one piece after another of negative news come out. The year included an unexpected rise in Lending Club loan defaults, a botched sale of loans in which information was misrepresented to investors, and the CEO being forced to disclose that he had an investment in a company with which Lending Club did significant business. The news resulted in the resignation of LendingClub CEO and a substantial number of institutional loan buyers suspending investments. LendingClub, which offers both personal loans and small business loans, spent the rest of the year tightening credit requirements, increasing interest rates, and trying to restore investor confidence.
LendingClub may have been the first hiccup, but they were not the last. 2016 also saw personal loan providers Prosper and Avant reduce their lending and increase their credit standards. It was also reported the peer-to-peer lender, Funding Circle, cut its loan generation by half in the first part of 2016, a response to a batch of underperforming. Then, in mid-November, it was reported that Dealstruck , an alternative lender of short- and medium-term small business loans, stopped lending operations altogether.
By the end of November, CAN Capital, who had announced earlier in the year of surpassing $6 billion in total lending to small businesses since operations began in 1998, was having their own issues. It was reported in the Financial Times that the CEO and several other executives were stepping down after some assets were underperforming and certain processes needed improvement. While CAN stopped generating new loans for 2016, it is expected they will resume making new loans in 2017.
But while some alternative lenders have run into problems, others remain confident that their model remains the future of lending. And many see the OCC’s proposed FinTech bank charter (the culmination of a review that began in August, 2015) as a sign the industry is both here to stay, and ready to grow up.
The Office of the Comptroller of the Currency’s December announcement made clear that “if the OCC decides to grant a charter to a particular fintech company, the institution would be held to the same rigorous standards of safety and soundness, fair access, and fair treatment of customers that apply to all national banks and federal savings associations.”
In an attempt to stay ahead to the curve, Kabbage, OnDeck Capital, and CAN Capital recently announced a new pricing transparency tool the call the SMART Box (Straightforward Metrics Around Rate and Total cost). The pricing disclosures, provided before small businesses borrowers accept financing, is aimed at increasing understanding of the cost of borrowing and ability to more easily compare those costs with dissimilar financing products.
While expanded oversight and regulation may be in order, the OCC also made the case for FinTech’s place in today’s world, saying “new technology makes financial products and services more accessible, easier to use, and much more tailored to individual consumer needs. Five years ago these services either were available only from traditional banks or not available at all.”
SmartBiz, an SBA marketplace and bank-enabling technology platform founded in 2008, is a FinTech company that not only avoided hiccups in 2016, but set records. It was recently announced that in fiscal year 2016, SmartBiz ranked first among providers of non-Express, SBA 7(a) loans under $350K with $200MM in loans. If you include SBA Express Loans, they still, ranked among the top five providers of all loans under $350K.
Both accomplishments are a first for a FinTech company. SmartBiz CEO, Evan Singer, attributes their success to SmartBiz’s ability to bring technology to banks while making customer needs their number one priority. “Meeting customer needs means saying yes to the loan size a customer needs, offering great rates, and providing terms that allow for low monthly payments.”
In order to be able to meet needs of more small businesses, SmartBiz has continued to grow its network of SBA lenders, allowing them to say yes more often. And after noticing that 20% of their customers were using mobile devices to during the application process, they optimized their site to be mobile friendly so that an application can be completed from a mobile device.
In addition, on December 14th, SmartBiz announced that they are expanding their offerings to include SBA 7(a) loans for commercial real estate. These loans will range in size from $350K to $5MM, have terms up to 25 years, and feature variable rates starting at Prime + 1.5. Having already drastically reduced funding times for loans under $350k, they expect to do the same with their CRE product, predicting the SmartBiz platform will enable funding times of between 4-8 week.
Another alternative lender for small businesses that has maintained investor confidence and has continues to grow its lending operations and expand its product offering is BlueVine. The company, which was launched as a modernized option for invoice factoring, recently began offering a line of credit product which now accounts for a sizable part of their business. After funding over $200MM in working capital for small businesses in 2016, they successfully raised $50M in additional funding to expand their efforts.
Some alternative lenders believe that the embrace of technology isn’t the only factor giving them an edge over traditional lenders. StreetShares, a provider of short term business loans with a focus on lending to veteran-owned businesses, was another alternative lender that was able to raise money in the tight market of 2016. Their co-founder and CEO, Mark Rockefeller, said that by, “incorporating technology with an affinity group, like military veterans funding loans to other military veterans, we’ve reduced costs to lend, reduced risks, and allowed us to make veteran small business loans more affordable.”
Alternative lending is not just seeing expansion in P2P and balance sheet lending for personal loans and small business loans. Alternative lending is also continuing to expand its presence in large sectors like commercial and residential real estate. In 2016, companies like LendingHome, RealtyShares, and Patch of Land have grown their lending and their reach. Marketplace lender LendingHome reached $1 billion in originated loans. RealtyShares and Patch of Land have each originated around $200 million in real estate loans.
“Alternative lending is dead because it’s no longer alternative. Large players like Goldman, Chase, Santander, ING and others are getting into the space,” continued Frohwein. “There’s not only a place for the upstart online lenders to continue their leadership in the space, but you’ll see another wave of innovation spearheaded by the most innovative of these players. Partnerships with innovative companies will continue to be the method by which large banks differentiate themselves from their peers.”
Such partnerships appear to be working for SmartBiz. “SmartBiz has taken the approach to actively partner with banks,” Singer said. “I think the companies that partner with banks will continue to do well. And I think the companies that are able to deliver on meeting customer needs will be the companies that continue to rise to the top.”
Through tighter internal controls, self regulation, and closer partnerships with traditional lending institutions, it appears that alternative lending will continue to expand its role in 2017. Their embrace of technologies to increase the availability of capital and improve customer experience points to a trend that can’t be ignored.
Marc Prosser, “What Do The Hiccups Of 2016 Mean For Alternative Lending In The New Year?” Forbes.com, December 30. 2016. Accessed via: http://www.forbes.com/sites/marcprosser/2016/12/30/what-do-the-hiccups-of-2016-mean-for-alternative-lending-in-the-new-year/#260aff3f3e05