Always driven by fundamentals and deep analysis.

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[This post was originally published on LinkedIn on 8th July 2016]

There’s been quite a bit of press around the trajectory of the online lending industry lately. However, a lot of what’s being said/written ignores fundamentals and lacks deeper analysis.

I refer to the article/link above to look at certain points the author brings up. It also gives me an opportunity to touch upon many other things and themes floating around on both sides of the Atlantic.

0. [Re: the article in link] You know who else has been laying off staff? The banks, for over 8 years now.

1. It’s simply astonishing to think that in 5 or 10 or 20 years from now, lending, and it’s whole lifecycle, will be dominated by any other way than through the internet in either an explicit or implicit fashion. Think 20 years ago without the internet and now — it’s really not that hard to extrapolate.

2. Online lending represents efficient origination methods, quicker decisioning and direct access to yield for investors. The first 2 are merely an evolution of technology, like we’ve seen in almost all other domains. The 3rd is because of the internet, where things are democratized, distributed and simply made accessible to a wider audience. These 3 things can work independently or with each other. Most people do not have a problem with these 3 when taken independently. However, combine all 3 together with negative sentiment, you suddenly get 27 year olds, a couple of years out of journalism school, analyzing loan books and publishing and predicting the doom of an entire industry in major financial outlets. Will there be bumps while establishing a “correct” model for online lending? Yes, of course. That’s what’s happening now. Think Ford, think Tesla, think whoever or whatever has had a massive positive impact on the world. The process of arriving at revolutionary technology that works just right will take iterations and will need a supporting eco-system.

3. Let’s understand some important reasons why lending companies are cutting staff:they want to focus on profitability and on core business. Shocking, innit? That’s right, when US startups finally decide to make adjustments in order to build a business like the rest of us rather than burn through VC capital for 250% MoM growth, hockey stick DAU graph, and optimized LTV:CAC ratios for their Series n+1 raise, people get rather surprised.

4. The article says, “The [online lending] companies mostly rely on investor confidence to remain high to lend. Banks, by contrast, can generally lend through more nervous environments because they are funded by insured deposits.” Let’s think about that for a second — “funded by insured deposits”. Insurance matters to me as a depositor, not to participants in the loan agreements. I hardly benefit from my money being lent out. This is banking technology that’s 100+ years old. Will the online lending companies and the related financial eco-system learn, evolve, seek and establish diverse funding sources with strategic investors and stable capital? Yes, absolutely. Can the banks lend efficiently to the real economy and stay away from maturity transformation, opaque packaging, risking my money where I probably don’t want it to be risked? Probably not. Will marketplaces match investors with the right duration and risk profile, not use my savings, provide credit to quality people and businesses who don’t necessarily satisfy 10 checkboxes that were designed in 1927? Yes. Do these marketplaces pose very low systemic risk during or post nervous environments? Yes. Will systems, structures, services and products be created in the marketplace lending eco-system to increase transparency, confidence and liquidity for investors, lending companies and other participants to ensure continuous availability of credit to the economy? Yes, most definitely.

5. Short-term volatility and adjustments are only natural. It also hardly matters whether alternative lending companies will take over banking or if banks will acquire startups, reinvent themselves and go back to dominating. Who wins does not matter here, it’s about what wins. It’s the underlying technology. The fundamentals behind marketplace and online lending are solid and the potential this technology holds is huge.

July 16, 2017
Jeevan Param

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