Is Marketplace Lending Still the Next Debt Collection Frontier?

I recently had the opportunity to attend the Marketplace Lending & Investment Conference in New York City. I came away from this conference believing this emerging market sector has tremendous potential and conveys a lot of promise, but it is still a good distance away from delivering on that promise.  On loan volume alone, it is a mere thimble in size when compared to the lending volume associated with traditional lending markets.  That may explain why it was stated by one moderator during the conference: “the majority of marketplace lenders are not yet profitable”  - a somewhat surprising comment given the financial benefits associated with Marketplace lenders use of the online digital channel, typical higher non-prime lending rates, and the operational efficiency advantages they generally gain with using Fintech Technology.  No doubt, this emerging market has a lot of growing pains and challenges to tackle, but one cannot help but be enamored with all of its potential. That potential probably explains why there is so much interest and talk about it within the credit and ARM industries.         

Marketplace Lending is generally described as non-traditional lenders that leverage Fintech capabilities to engage in offering non-prime loans to consumer via on-line.  Their main source of funding has come primarily from private investors and private equity firms, which has been key in terms of enabling them to quickly come to market.  However, unless these private investment sources are extremely large, the capital funding can quickly dry up.  As such, the Marketplace Lending Conference was really about two concerns: 1) obtaining more capital for loan growth, and 2) looming regulatory / compliance changes.  Both of which are the main challenges to real growth in this market sector. 

I learned at this conference that while it was generally believed that online lenders armed with Fintech technology pose a serious threat to banks, and credit unions, this is not necessarily the case.  The threat, while certainly real, should not be considered an immediate concern.  The reason being, as previously stated, marketplace lenders have the challenge of not being able to drive to the next level of loan growth due to not having easy access to more lending capital.  Banks and credit unions, as a whole, do not have this same challenge or at least not to same degree.  Traditional lenders have a mature financial eco-system in place to more easily obtain capital, as well as handle the multitude of activities throughout the entire credit process - from various funding options, all the way through to collections, recovery and debt sales.  This gives those banks and credit unions a big leg up on marketplace lenders, who are still attempting to develop out their own financial eco-system.  Furthermore, instead of competing with marketplace lenders, many banks and credit unions have been quietly investing in and or acquiring loans from marketplace lenders as a means to drive up their own loan volume through an alternative channel.  

With respect to developing eco-systems and platforms, the marketplace lending sector has not yet invested a lot of time and attention on the management of delinquent accounts or bad debt.  This is due, in part, to being more focused on lending activities such as marketing, ramping up loan application volume, and refining their customer onboarding process.  Also, for many of the marketplace lenders, the number of delinquent accounts is relatively small at this point in their portfolio growth and is not having a sufficient enough impact on financial performance to warrant shifting more attention, expenses and development to their backend operations.  As such, the majority of marketplace lenders currently elect to outsource collections efforts.  These marketplace lenders will either outsource the entire collections and recovery effort, or do so for delinquent accounts that reach later stages of collections, typically at sixty days past due or greater.  Generally speaking, these marketplace lenders typically only employ one or two outsource partners.  Therefore, agency management activities and related tools are not necessarily complex or sophisticated.

As I left the conference, I walked away thinking that in the not too distant future the Marketplace Lending Industry and the ARM Industry have the potential to become the perfect partners.  Marketplace lenders will soon start to shift more of their attention to portfolio management and collections as it rises in relative importance towards the continued success of their business (along with more origination volume, and more sources of capital).   However, these lenders all are not about building out large, costly, and difficult to manage infrastructures, or having lots of personnel performing manual tasks.  This is true especially with regard to collections, recovery and debt sales.  The marketplace lenders would much rather engage in a truly strategic and close partnership with a collection agency to leverage their expertise and established collection services.  In particular, these lenders are interested in working with those agencies that have invested in modern collections platforms with the latest functionality, along with streamlined processes, and strong compliance capabilities Most importantly, the lenders are looking for partners whose collections culture aligns with those of marketplace lenders (focus on customer care / customer service).