Shifting investor mix
Perhaps first and foremost among the changes that will come of 2016 are changes to the major online lenders' investor bases. The biggest US platforms like Prosper and Lending Club proved that fears over the concentration of their capital bases were well founded. Investor demand began slipping in the early stages of the year, when Moody’s placed a bond offering backed by Prosper loans on review for downgrading. The ratings agency in the end decided against a cut, but the move embodied a general feeling of uncertainty over the performance of marketplace loan portfolios at the time.
Subsequent events have shown that US platforms are now seeking to re-prioritise their retail investor bases, in much the way that their UK counterparts have for years. When confidence in the sector was shaken, the US platforms were much worse hit because of their overreliance on flighty hedge funds, family offices and smaller asset managers. We’ve seen both Prosper and Lending Club seek to sharpen their retail investment propositions over the past six months, and that’s a trend that’s likely to continue.
The crisis of confidence in the online lending sector was brought to a head by the effective firing of former Lending Club boss Renaud Laplanche, who had been found to have fiddled with loan data. But Laplanche – who is now heading up a new lending venture by the name of Credify – was far from the only big name to be claimed by 2016. Former Prosper CEO Aaron Vermut also stepped aside, as did CAN Capital’s Daniel DeMeo.
But the sector has also seen an influx of talent, flowing almost exclusively from the world of mainstream financial services. Both Lending Club and Funding Circle hired formers bankers to be their new CFOs, as indeed did a host of their competitors across the online lending space.
Only a few weeks ago we received the latest update on the FCA’s ongoing post-implementation review in the UK. FCA boss Andrew Bailey said it was necessary to strengthen investor protections across both the equity and debt based varieties of crowdfunding, with standards of disclosure also needing improvement. The UK regulator has consistently threatened that it might consider new rules for the space in early 2017, including “more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based” platforms.
In the US, top regulator Thomas Curry said at the start of December that he will consider granting licences to fintech firms, allowing them to operate independently of the banks. But the move brings with it as many questions as it does answers, such as: will successful applicants will be able to pick a base state and use the usury limits of that state, as the banks do? And can firms continue to use a partner bank for origination purposes should they choose to?
Adjusting for change
Beyond industry-centric matters, 2016 was almost certainly the most turbulent in the brief history of the alternative finance space from a macro-economic standpoint. From Brexit, to Trump, shifts in the base rate, changes to the tax regime (stamp duty changes were especially important in the UK), the platforms have been well and truly on the back foot. And many have been forced to make changes. Zopa, for example, has twice adjusted its targeted interest rates for investors. The future of Funding Circle's relationship with the European Investment Bank has been cast into doubt, and the firm has been calling on the British Business Bank to step up. The platform has also been forced to run post-Brexit stress tests as a show of resilience for its institutional investors during the past few months.
But despite these sweeping changes, the overriding sentiment among alternative finance providers – of all kinds – has been one of optimism. Many different platforms see this – a period of bank retrenchment in many areas – as a time of opportunity, rather than hardship. Time will tell whether their positivity is well-founded.
Perhaps the boldest change to have been announced by any platform came from Zopa, which declared in November that it would be pursuing a banking licence. This – from the world’s original peer-to-peer lending platform – is a step-change, and it raises questions about the ongoing feasibility of the pure marketplace lending model (and those questions have already been asked by some within the mainstream media).
Is Zopa’s decision an implicit admission of the shortcomings of the pure marketplace approach? Or is it simply a well-timed landgrab by a firm that has seen a large number of digital-only upstarts authorised within the UK over the past few years? And finally, will Zopa be alone on the road towards becoming a bank, or will others within the online lending space seek to follow suit? 2017 will be the time for answers.