Digital Finance and Marketplace Lending Year in Review

Financial Services Law

Top Five 2017 Takeaways From Manatt’s Digital Finance and Marketplace Lending Team

2017 was a banner year for digital finance, as cryptocurrency made headlines, the SEC cracked down on ICOs, alternative lenders broadened their portfolios and the industry entered the mainstream. Below, we count down the top five takeaways in digital finance and marketplace lending.

5

LendingClub Problems? That’s Soooo 2016

Digital finance hit its stride in 2017. After a rocky patch last year when major players suffered declining performance and embarrassing disclosures, the industry recovered solidly in 2017 with originations up sharply year-over-year. Despite increasing volume, the pace of new entrants and growth of legacy players slowed, suggesting maturation of the industry. At the same time, several consumer and small-business platforms folded, pointing to further consolidation. At the major platforms, visionary entrepreneurs are giving way to operating CEOs, with notable C-suite changes at Prosper, SoFi and Patch of Land. We expect 2018 will be another strong year for online and marketplace lending as economic growth continues and Washington eases oversight of the financial industry.


4

Alternatives to Traditional Lending Are in Vogue

Online lenders and borrowers (and investors and originators, servicers, and managers) have more options than ever before. Digital finance expanded, not only in size but also in scope. We’ve seen increased activity in student lending, point-of-sale lending, retail installment lending, merchant cash advances, rent-to-own and numerous other formats. Marketplace lenders also have shown interest in bringing new alternatives to market, including cryptocurrency and precious metals–backed lending. Contrary to this trend, however, we also have seen greater caution around tribal lending.


3

Cost of Funds Is King

In the crowded lending marketplace, only the well-funded survive. Controlling the cost of capital remains critical. Successful digital lenders have found myriad ways of doing so. Loan purchase agreements have proliferated from institutions, family offices and overseas funds. Platforms have managed to stack multiple funding providers based upon capacity and purpose. And the securitization market has been active, enabling platforms to refresh capital. We expect the race to funds’ cost bottom will continue as platforms continue raising their own investment vehicles (e.g., MoneyLion) and launching private placement and Regulation A offerings to crowd-source capital.


2

Bank Partnerships Are Alive and Well

Special purpose national bank charters for fintech? Not so fast. The OCC’s proposal last March raised more questions than it answered. While the newly installed comptroller, Joseph Otting, is reportedly supportive, we expect fintech charters remain at least a year away. In the meantime, online lenders continue to partner with traditionally chartered banks such as Cross River Bank and WebBank in order to lend nationally. With the pendulum in Washington swinging away from enhanced financial industry oversight, marketplace lenders can expect greater leeway in their activities. That said, we would not be surprised to see state regulators step into the regulatory vacuum, as evidenced by Colorado’s recent suit against Avant and Marlette Funding.


1

Cryptocurrency and ICOs in the Crosshairs

Bitcoin has been hailed as a digital revolution and a ruinous economic bubble, and that was just last week. Cryptocurrency and related offerings were white hot in 2017, with no sign of cooling. Yet huge potential for fraud and abuse remains as bad actors exploit investor unfamiliarity with blockchain technology. And hackers continually probe for weaknesses. South Korean bitcoin exchange Youbit collapsed just last week after losing a fifth of its clients’ holdings to cyber-thieves. The SEC and CFTC have issued cautionary reports and launched enforcement actions. SEC Chairman Jay Clayton recently warned of minimal investor protection and rife opportunity for manipulation in this space. We expect regulators will remain laser-focused here, with additional enforcement actions likely.


For further information on these developments or on the firm’s fintech practice, feel free to contact the authors.