Top Trends in Online Lending for 2016

Opinion

Though online lending has been around for over a decade, the past year was a big one for the sector. There was at least one notable IPO in late 2014, a groundbreaking partnership with one of the largest banks in the U.S., and several young online lenders crossed the billion-dollar mark in valuations. Momentum is building as consumers and governments alike take note of the industry’s growing impact on the financial ecosystem.

Morgan Stanley estimates the size of the U.S. online-marketplace lending industry to be around $1.9 trillion, based on 2014 data, and anticipates a 47 percent compound annual growth rate through 2020. Moving into 2016, these are three of the biggest trends people should watch for in online lending:

1. Expect to see more online lenders working with the banking industry, instead of disrupting it.
Burdened with antiquated underwriting models and legacy systems to assess the creditworthiness of consumers, traditional banks will look to online lending platforms with greater technological infrastructure to better review candidates. Online lending startups usually have the agility and flexibility to accommodate and respond quicker to consumers’ needs with shorter applications, lower borrowing costs, real-time approvals, and next-day funding.

In December 2015, J.P. Morgan announced a pilot program to offer small business loans through fintech lender OnDeck. It’s one of the largest partnerships of its kind, but all signs point to this trend continuing in 2016. Taking advantage of the convenience and on-demand nature of the online process, banks will gain access to a wider customer base, while leveraging existing loyalty to create a bigger pool for all, through these collaborations. Applicants who may have previously been denied a loan based on their credit score alone will have a second chance to have their creditworthiness assessed using a more diverse set of variables. Building off each industry’s strengths in customer experience and service, online lender-bank hybrids will continue to flourish in the new year.

2. Regulators will pay closer attention to the online lending industry.
The online lending industry has been very active over the past several years and shows no signs of slowing down. As a result of this rapid growth, the space has piqued the interest of regulators who will inevitably take a closer look to understand the advantages and risks of this new business model.

Online lending is already a highly regulated industry, overseen by many of the same regulatory bodies as traditional banks at both the state and federal levels. In 2016, regulators will begin to investigate the industry’s credit underwriting practices and relationships with financers to ensure that consumers are being protected. This could open new opportunities in previously underserved markets and will add more transparency as alternative lending becomes the norm.

3. Smaller players will struggle to keep pace with massive growth in online lending.
Interest in the space is at an all-time high, so new entrants and smaller platforms will continue to make a play for market share in 2016. However, with Lending Club going public last year and Avant, SoFi, and Prosper all recently joining the unicorn club, certain leaders have emerged and the distance between this handful of companies and their competitors continues to widen.

The online lending industry, overall, has high barriers to entry – requiring large amounts of capital, oversight to ensure regulatory compliance at multiple levels, and technological sophistication to ensure that risk is being priced accurately. Most significantly, attracting investors can be a challenge for unproven newcomers, whose brands and value proposition remain untested. Due to these obstacles, 2016 will see a greater divide between bigger, established players and unproven up-and-comers.

Al Goldstein is the co-founder and CEO of Avant, an online marketplace lending platform that is changing the way consumers obtain credit by lowering the costs and barriers of borrowing. Follow @Avant_US

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