I have just returned to NYC from San Francisco, where I attended the LendIt USA 2016 Conference. Having been lucky enough to see the Broadway hit "Hamilton" recently, I thought on the plane flight back east that our "$10 founding father" would have been mesmerized by, proud of, and likely taking some credit for the whirlwind of financial services innovation on display at LendIt.
As an investor in and advisor to several FinTech companies operating in the online lending ecosystem, I thought it might be useful to share a few of my "learnings" from this annual FinTech confab. I not only had the opportunity to speak on the Fund Manager Insights panel (thank you, Peter Renton and Jason Jones for the opportunity), but I also had the chance to listen to and meet with many industry experts, FinTech CEOs and executives, venture capitalists (VCs), investment bankers, and investors in marketplace loans.
While this blog post is assuredly not a data-driven synopsis of the event, it is important to start with one of the most salient event factoids: over 4,000 participants from over 20 countries attended #LenditUSA 2016, an increase of over 60% from the prior year. I believe that fact tells us much about this industry, which I believe continues to grow and evolve.
LendIt Learning #1
I believe this bit of pith from one lending platform CEO summed up the general tone of the conference: "The hype-to-reality ratio is lower this year and more in line with where it should be."
Certainly, industry growth trends remain: new companies, new lending niches, internationalization of the business, and more origination by the established players. However, there is also a sense that this industry has serious issues with which to contend. Many of these were eloquently raised and discussed in Ron Suber's outstanding keynote address: troubled securitizations, rating agency downgrades, regulatory and legal (Madden v. Midland Funding) uncertainty, fraud headlines, lower public and private valuations, and meaningful competition from other alternative and high yield investments that seemingly and suddenly became more compelling relative to marketplace loans in the recent volatile markets. These issues have contributed to a sense that even though the industry trend is still clearly positive, it will not be a straight line. To most industry insiders, this seems healthy in the long run, provided the uncertainties noted above can be addressed.
LendIt Learning #2
Broader, deeper, more stable, and more diversified sources of funding are needed for the industry to scale and continue to grow at the rates of the last two years. Opening investor access to the category is one solution. Lending funds, transitional capital, and VC are all potential parts of the equation. Ultimately, I believe, pension funds, endowments, foundations, insurance companies, and other deep pools of long-term capital need to be tapped.
But to win over these large, sophisticated investors, a major amount of Suber's "EAU" (Education, Awareness and Understanding) needs to take place. This will take time and, most importantly, solid loan performance through this current environment as well as through a truly weak credit cycle. The point is that the marketplace lending industry has to begin the long, often arduous process of talking to and creating funding partnerships with these institutions. Securitizations can certainly also be a part of the solution but as a recent securitization of loans shows, poorly executed deals can actually damage investor demand for loans and raise questions about pricing and credit quality. The best financial institutions have typically diversified their funding sources and the same is proving true with respect to online loan originators.
LendIt Learning #3
Borrower niches continue to be exploited. At LendIt I learned about real estate (commercial, residential, and "fix and flip"), automobile (prime and sub-prime), purchase finance at the point of sale (and online point of sale), and many different approaches to and types of small business loans. I think we will continue to see more and more niches attacked by entrepreneurs seeking to use the efficiencies gained from originating and underwriting loans using technology to undercut more traditional methods of credit extension. Whether these niche online lenders will be able to stand on their own as independent companies or will be consolidated into larger players remains to be seen. But these differentiated types of loans — some secured and some unsecured — offer investors a range of choices and I think this will be increasingly important to investors over time.
Bill Ullman, Director of Van Eck Associates Corporation and Senior Advisor to several FinTech and marketplace lending companies including Orchard, had the distinction of speaking on one of the LendIt USA workshop panels. He has written this special post highlighting his takeaways from the discussion.