There is no doubt marketplace lending, by offering speed and flexibility not historically seen in traditional banking, has done its part to foster the “do it yourself” (DIY) era. At its core, the DIY mindset starts with a question – why pay someone to do a job or share your profits or glory, when you can do it on your own? And ideas come to fruition through the vast amount of information now available to model success. In this DIY age, it seems anyone can start a company, create a fund or even start a blog. This spirit had always been present, to some degree, in the corporate world, and has already been seen in online lending (think Eastern, Marcus by Goldman Sachs and Barclays). It wouldn’t be surprising if this year, market dynamics foster more DIY strategies, playing out in a number of ways that will reshape marketplace lending’s trajectory.
The industry’s rapid growth reflects in part the entry of more than 100 new players in the market in less than a decade. They’ve helped online lending penetrate markets historically dominated by traditional lenders like real estate and auto. But there is a great chasm between the larger, stronger players in this field and those that have failed to create a niche or haven’t been able to obtain the scale necessary to survive. This divide will create opportunities for mergers and acquisitions, where complementary operations can be bolted on or technology brought in-house, increasing the chance of success relative to starting from scratch.
Private or White Label Technology
Given the legal challenges mounted by states, such as Colorado, to the bank partnership model, and uncertainty as to whether a Madden fix will be enacted by Congress that will safeguard preemption of local usury laws, banks may be more enticed to invest in the development of their own online platforms. This in turn should create opportunities for technology developers to provide traditional banks a turn-key service.
The exponential growth of online lending could prove too tempting to ignore for payment technology providers and service entities that facilitate digital payment platforms. These service providers are already online tech savvy and could expand to help generate the payments they facilitate.
In any form, whether homegrown or through M&A, a DIY mindset could accelerate the weeding out of the weak, but overall benefit the industry through stronger competition, consolidation of resources and focused effort, and that, as Joe Biden would say, could make DIY a “BFD.”
James Serritella, a partner, and Massimo Giugliano, counsel, contributed to this post and are members of the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert.