38 NOVEMBER / DECEMBER 2019 Fintech and Technology Changes to consumer/small business lending OPERATIONS / TECHNOLOGY Julie Stackhouse Executive Vice President Federal Reserve Bank of St. Louis Julie.Stackhouse@stls.frb.org Technology-enabled lending – frequently dubbed marketplace lending – has branched far beyond its initial beginnings as person-to-person (or P2P) lending. Whereas P2P lending featured individual investors financing loans to consumers, marketplace lending is much broader. It includes multiple types of financial, nonfinancial and institutional lenders and also investors such as hedge funds. These lenders leverage data analytic techniques (such as machine learning) and mine massive amounts of data (so-called “big data”) to underwrite loans.1 According to data cited by the Department of the Treasury, this sector has grown from infancy in 2006 to $26 billion in loan originations in 2017. One analyst predicts loan origination volume will hit $90 billion by 2020.2 Marketplace Lending Models There are two common models for marketplace lenders: direct lenders and platform lenders. Direct lenders – also known as balance sheet lenders – use funds (capital) generated from outside sources to originate loans. Most of these loans are kept on the lender’s books after origination. Some of the better-known direct lenders include CAN Capital, Kabbage and SoFi. Platform lenders, on the other hand, partner with depository institutions to originate loans that are then purchased by the lender or by an investor using the platform. LendingClub, Prosper and Upstart are prominent examples of platform lenders. Some lenders cater to one type of borrower (such as small businesses), while others provide a variety of products such as small personal loans and mortgages to consumers, as well as lines of credit, fixed-term loans and cash advances to businesses. Marketplace loans start with an online application filled out by a prospective borrower. While underwriting may consist of conventional checks such as credit scores, income and debt repayment history, it might also be based on less traditional data such as monthly cash flow and expenses, educational history, payment and sales history, and online customer reviews. Where Banks Come In Though competitors with some marketplace lenders, banks have played an important role in the growth of this market by: • Purchasing loans originated by marketplace lenders; • Using marketplace lending platforms to originate loans using the bank’s name; • Providing operating loans to marketplace lenders; • Underwriting the securitization of marketplace loans; • Clearing and settling marketplace lending transaction proceeds. Whether acting as a partner or a facilitator, banks benefit from the technology-enabled lending. Properly conducted, consumers and small business borrowers benefit from the ease and convenience of technology.
RkJQdWJsaXNoZXIy MTg3NDExNQ==