eOriginal: Why Online Lending Lacks Consistancy

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Consistency is, and will continue to be, the biggest problem that the FinTech Marketplace Lending industry will face in 2016.

Although FinTech start-ups are still subject to many of the same regulations and rules as traditional institutions, the ambiguity with the law and lack of federal regulations specific to marketplace lending, has enabled the industry to create and maintain their exponential growth, often edging out traditional institutions. While most reports of the online community are overblown in portraying the space as a no rules, lawless, Wild West, there are still steps that need to be taken by lenders to add maturity into their lending practices to provide assurance and peace of mind to institutional investors.

Institutional investors have always been attracted to the marketplace lending asset class for their double-digit returns, perceived low volatility and growth projections unlike any other industry, which can result in consistent cash flow. And, with these benefits, institutional investors now represent the majority of investors.

Is the Honeymoon Period Over for Investors?

Unfortunately, the honeymoon period may be over between marketplace lending and its investors. According to a recent article in American Banker, “Marketplace Lending’s Big Investors Grow Anxious”, investor sentiment is shifting from excitement to increased anxiety and skepticism as the ‘invincible’ industry has experienced an increase in delinquency resulting in shrinking yields for investors.

What will ease these concerns? An uptick in yield will only be a temporary fix to calm the nerves of investors. The players within the online lending arena must come together to define and establish best practices for due diligence within lending and investor access to marketplace assets.

By bringing together all of the key players, institutional investors and investment managers will not only be able to properly understand what they are investing in, but what the standard should be for infrastructure and operational processes.

Establishing a Best-in-Class Infrastructure to Mitigate Risk

The lack of certainty and risk mitigation, which plagues many marketplace lenders, can not only be troubling to current and future investors, but can and will be a problem for lenders when dealing with the post-signature management of the assets.

The current reality of managing assets in the marketplace lending industry involves originators dealing with multiple different types of systems to house and handle the loans and contracts. If you were to examine three similar types of marketplace originators, all three are originating and passing data to investors differently. Furthermore, data passed to custodians is different, access to how third parties can view assets is different and assets are stored in several different locations.

As leaders in the industry, we are making it impossible for institutional investors to evaluate and practice due diligence on their investments when our processes are different. While the online lending arena is alternative, it is not the Wild West; marketplace lenders are simply taking an antiquated process and moving it to the 21st century.

Nevertheless, the bottom line is that there is no consistency in how these assets are managed post signature. It now becomes a full-time job keeping track of permissions and assets across several origination platforms, which can open the organization up to more risk in their processes.

Lenders must look to the future. The sheer volume of digital assets is only going to grow and many lenders will be using digital contracting processes for higher-risk assets. They must act today to build the foundation to manage larger scales of digital contract transactions and more complex environments.




FinTech Standards Board for Online Lending


eOriginal has been a pioneer in facilitating these best practice discussions. As a new member of the California FinTech Network, eOriginal’s John Jacobs, Director of FinTech Strategies, has joined the FinTech Standards Board for Online Lending. The board is currently comprised of a small group of lenders, investors and service providers from organizations such as Funding Circle, Prosper, Wells Fargo, Transunion, DocuSign and Ldger. The newly formed working group will focus on the due diligence standards for marketplace lending, with the goal to produce guidelines for investor access to marketplace assets.


Join our Technology Workshop at LendIt USA


Logo-Color-PNG-1024x857To continue our dedication to the industry, eOriginal will be a Silver Sponsor of LendIt USA  next week: April 11 – 12 at the San Francisco Marriot Marquis. Additionally, in a dedicated Technology Workshop, Tuesday, April 12, I’ll be participating as a panelist on: Cybersecurity and Fraud in the Loan Process. I’ll be joined by James Varga,CEO Direct ID with MiiCard, Tim Ranney, CEO of Clarity services and Jay John, with Iovation. If you’ll be at the San Francisco event, please schedule a meeting today Here or stop by booth 814 to discuss how to achieve consistency and certainty in your lending practices.