Alternative lenders such as Lending Club and OnDeck should not be popping the bubbly too soon, as there could be major stumbling blocks along the way to their success if they don’t overcome challenges that stymied earlier startups, according to a guest analysis in the American Banker.
While online marketplace lending is innovative, these alternative lenders could stumble just like former online lenders NextCard, Providian and E-Loan if they move too fast and don’t pay attention to key challenges, wrote Kenneth A. Posner, chief of strategic planning and investor relations at Capital Bank Financial.
The alternative lenders have very sophisticated credit decision-making processes, but so did most banks before many were hit hard by the subprime mortgage crisis, Posner writes. Credit models have to be more predictive by taking into account forward-looking factors such as potential credit saturation, or alternative lenders could face their own version of a “black swan” event.
Online marketplaces also need to significantly boost their distribution channels if they want to attract more customers—and vastly lower their prices, he wrote. OnDeck’s small business loans last year had an average annual percentage rate of 54%, and Lending Club’s consumer interest rates range from 6% to 26%—both much higher than the rates offered by traditional banks.
Moreover, since alternative lenders don’t accept deposits like traditional banks, their business models are more vulnerable to credit losses and fluctuations in the economy, according to Posner. They should consider additional sources of financing in the event that their current investors become skittish once economic or credit trends deteriorate—or face downsizing.
Alternative lenders should also pay close attention to consumer laws and other banking regulations, particularly if are partnering with issuing banks, or else they might have to abide by state usury rules that cap interest rates.
Technology can only take a lender so far, Poser concludes.“That’s why traditional banks are still with us, no matter how old-fashioned they sometimes seem.”
Source: American Banker
Featured image: Thinkstock