Marketplace lenders like Lending Club and On Deck Capital have not been profitable. While loan origination grew, their expenses outpace revenues.
Lending Club and On Deck Capital are in trouble. In 2016, both firms used the excuse that they were in rebuilding phase to explain the lack of profit. The latest 4Q report for 2016 were out in Feb 2017. Origination of loans increased, but profitability dipped, again.
Lending Club’s full year 2016 net loss of US$ 37.9 million (2015 net income was US$ 56.8 million). On deck lending did no better. Their adjusted net loss was US$67.0 million. Their 2015 income was US$ 10.3 million.
Just looking at Lending Club’s revenue between 2012 and 2016, we observed aggressive growth in revenue. But margins have not improved.
Financial ratios such as the return on asset and the return on equity have not turned positive since 2014. One reason is the initial cost of customer acquisition. When a large bank expands, they can count on cross selling and synergies within segments. For example, the investment bank can refer lending customers to the commercial bank, the commercial bank can refer deals to the investment arm of the bank. For pure digital plays, each customer is a new one. The reliance on marketing to educate and acquire customers is costly.
We only need to inspect On Deck Capital’s cost of services versus their total revenue. In each year except for 2015, the cost of services outstripped revenue. In addition, the speed of revenue growth is not faster than the speed of the growth in costs.
A closer look at On Deck Capital’s provision for loan losses paint a clearer picture about the problem. There is an urgent need to refine the loan pricing model. P2P lenders paint a rosy picture about their abilities to lower the cost of borrowing by offer a smaller spread compared to traditional financial institutions. But is this at the cost of a flawed model and increasing loan provisions?
In 2016, marketplace lenders restructured their operations by laying off employees and changing management. Many have asked the sustainability of their cashflow and lending. The case for digital lending remains compelling. Some question new age lenders merely rode on the Fintech gravy train. Will they continue to be exciting enough for investors when the fad is over?
The case is clear. Lending Club and other smaller marketplace lenders need to control cost of providing loans. One way is to redefine their loan underwriting model. Second way is to lower the cost of consumer acquisition.
The basic propositions of online lending come down to cheaper and faster loan origination. Fintech companies believe they are faster because their data driven underwriting model and the simpler paper work. They also believe they can be cheaper because of these efficiencies and their willingness to earn a smaller spread than bankers. These propositions are not unique to banks. Banks have been offering 24-hour approval for selected loan products. While banks are arguably heavier in paper work, they have been keen to study and adopt blockchain technology for their back office operations.
All source:Lending Club Annual Report, On Deck Capital Annual Report