Online Lenders Prepare For A Recession

Online lenders in the U.S. including LendingClub, Kabbage, and Avant are gearing up for a slowdown in the economy and are taking a look at their risk exposure as they prepare for what they see as the inevitable.

Reuters, citing interviews with half a dozen online lenders, reported the companies are worried that a recession could hit the U.S. economy, bringing with it an increase in credit losses, the potential for the need for liquidity and higher funding costs. It would be a test for many of the online lenders that haven’t lived through an economic downturn. After all, many of the online lenders were born out of the Great Recession and have never had to deal with downturns like the traditional banks. Traditional banks have lower costs and a higher number of deposits, making it cheaper to lend money.  These online lenders also underwrite loans differently, relying on less traditional data points to approve loans. Those underwriting methods haven’t been tested yet when the economy is in a slowdown.

“This is very top of mind for us,” LendingClub Chief Executive Officer Scott Sanborn said in an interview with Reuters when asked about the chance of the U.S. economy entering a recession. “It’s not a question of ‘if,’ it’s ‘when,’ and it’s not five years away.” The executive and others at online lenders told Reuters that economic indicators and forecasts are worsening, prompting them to be more cautious. Bhanu Arora, head of consumer lending at Avant, concurred, telling Reuters it wants to be prepared and ready as economists start sounding the warning bells. Avant put a plan in place last year which includes making lending requirements more stringent for segments where there is a higher risk of default, reported Reuters.

BlueVine Capital, the small business lender, is preparing for the potential slowdown by looking for credit facilities that have longer durations. Chief Executive Eyal Lifshitz said it would rather have a credit line that lasts longer than save a few basis points.  “We are making sure we are locking in capital for longer periods of time, and from providers that we trust and we know are going to be around,” Lifshitz said in the report. Meanwhile, Kabbage co-founder and president Kathryn Petralia said its recently completed $700 million asset-backed securitization is going in part to prepare for a slowdown in the U.S. economy.

While the executives at these online lenders are preparing, they also told Reuters they haven’t seen any evidence that the loans on their books are souring. Its also not a guarantee that the economy will enter a recession. JPMorgan has relived some of those fears, reporting better than expected quarterly earnings late last week, driven by what the bank called solid growth in the U.S. economy.