2017 was a tough year for some of the biggest names in alternative financial services in the U.S. – Prosper, OnDeck and LendingClub, in particular.
Among investors – both those who buy loans on the platforms themselves and those who buy stock in the platforms on Wall Street – much of their earlier enthusiasm was replaced with genuine skepticism, as delinquency and charge-off rates have risen and prime borrower interest has waned.
Meanwhile, regulators have begun debating the merits of marketplace lending.
That debate came to something of a confusing head this fall, when it seemed that three different branches of the Federal Reserve banks came up with two opposite conclusions as to whether marketplace lending represented a positive good for financial inclusion, or just a new method by which to predate on financially vulnerable consumers. The Philadelphia/Chicago Federal Reserves were the cheerleaders, while the Cleveland Federal Reserve represented “jeerleading.”
The Cleveland study was eventually withdrawn due to defects in the methodology used to gather and analyze data, including some degree of misunderstanding about the term “marketplace lending” as a generic description a non-bank loan. But the derision didn’t bode well for a segment trying to rebuild its reputation after a scandal-ridden 2016 – and it was disturbing to note that at least some of the people tasked with examining it seem confused.
And that was just one element of what proved to be, by any measure, a difficult year.
Some small victories were notched: LendingClub managed to beat Wall Street expectations in every earnings report it put out this year; OnDeck has extended its lending partnership with JP Morgan Chase for another four years; and Prosper reported cash flow positive status for the first time in its corporate history during Q2 2017 – a trick it repeated in Q3, according to its CEO (and former CFO) David Kimball.
But the situation remains uncertain. Kimball told his own investors that until “very recently,” Prosper could have fairly been included in the “deathwatch category” in early 2017, and that remaining in healthy territory requires constant focus and a push for an “expanded toolkit” in the next year.
And Prosper is not alone as it examines its options for taking the field in 2018, with the goal of outrunning that volatility and getting the segment back to where it was a scant 24 months ago. But, as Kimball noted, the climb will be a steep one.
A Tough Year
There were times in 2017 when it seemed as though marketplace lending and lenders couldn’t catch a break.
LendingClub beat earnings expectations in Q1, came back and did it again in Q2 and even knocked off the hat trick in Q3. Their stock dropped after each earning report; in Q3, it plunged a full 20 percent.
By the end of 2017, LendingClub’s stock price had hit a record low after that Q3 earnings report (despite being better than expected), which raised the firm’s loss estimate and slashed its revenue forecast for the current fourth quarter.
“The last 18 months have been among the most challenging of my career, but my conviction has never wavered: Consumer credit is a data problem that a technology-driven marketplace is well positioned to solve,” noted LendingClub’s CEO, Scott Sanborn, at its first investor day in early December. “That’s what drew me to LendingClub when it had less than 40 people, and what continues to excite me today.”
And LendingClub is not alone in feeling the challenge. OnDeck, the SMB marketplace lending platform, came into 2017 on such weak footing that it was widely speculated that it was about to be snapped up by Kabbage in a fire sale – and though their position had started to recover by the year’s halfway mark, it was caught reporting a surprise loss in Q3. Reason given? Hurricanes.
“The bottom-line results would have been even better, but for the negative impacts from hurricanes Harvey and Irma, which caused us to increase loss reserves by $3.5 million,” OnDeck CEO Noah Breslow told investors in a call after the results were announced. “Customers representing approximately 11 percent of our loan balances were located in the counties designated by FEMA as disaster areas.”
Investors didn’t like the losses, and OnDeck’s stock price took a stumble of 3 percent – but by year’s end, that number had recovered, and the company’s stocks ended the year up over 25 percent.
Prosper was also hit hard in 2017, as the firm lost approximately 70 percent of its valuation. That came along with a $50 million funding round, which dropped its value from an estimated $1.9 billion to $550 million, according to internal sources.
Despite the hit, Prosper’s CEO remained positive. “This investment is a strong signal of confidence in our business fundamentals and the momentum we are seeing right now,” said Kimball in a statement.
“Over the past year, we’ve shown that we can build a sustainable business that continues to redefine the online lending experience for our borrowers and investors. We believe this partnership will open up additional opportunities for our business as we continue to grow.”
The 2018 Landscape
The situation remains uncertain for marketplace lenders who are entering another year largely on their back foot, albeit ever more committed to moving forward.
Breslow is hyping OnDeck’s future of partnerships with mainstream baking players – in particular, calling out a renewed partnership with JPMorgan Chase in August to expand the banks’ SMB lending reach.
Breslow told investors the company would announce its second major bank partnership in the first half of 2018. “Partnership interest from banks continues to increase,” he said.
Prosper, perhaps unsurprisingly, is focused on remaining prosperous, as measured by profitability and further developing its new securitization platform. The company reports that it has had three securitization transactions on the platform thus far, with “47 unique investors, $1.5 billion out there,” Kimball said.
“To be cash flow-positive, certainly as an investor you want to make sure that the servicer is going to be solvent, is going to be around, which is why everyone was concerned before,” Kimball said. “And to be in a position where you’ve got people buying your loans, you’ve got a securitization platform, that you’re able to generate cash, it just puts you in a vastly different situation.”
LendingClub finally got investors to show them some love – and after its record low following its analyst day earnings accounting, stock jumped 15 percent in mid-December and has managed to hold relatively stable.
Marketplace lending survived 2017 – and that is mostly the best that can be said for it.
The question for 2018 is: Will the segment merely live to fight another day, or will it show some signs of living up the potential that was so widely predicted such a short time ago?
We will, as always, keep you posted.