In just over a decade, alternative lending has evolved from a niche fintech play into a hundred billion dollar industry. 2017 was somewhat of a bumpy ride. Growing competition, shrinking bottom lines, stringent regulations, and traditional banks’ willingness to take on alt-lending using their financial muscle were the key trends that emerged last year. It is difficult to be sure what 2018 will bring, but here is what experts and pundits are predicting.
Ron Suber (Founder and former president, Prosper & chairman of the board, Credible) believes the marketplace lending industry has finally grown up. Companies will focus more on cash flow, profitability, and EBITDA. He encouraged online lenders to look for a lower cost of capital if they want to compete with the like of Marcus. He is also predicting the entrance of big technology companies like Amazon, Apple, Facebook, and Google.
Peter Renton (Lend Academy) believes five of the top 25 banks will launch their own platforms. He also believes Congress will pass a Madden fix and the IRS will modernize with its own API. One startling prediction he makes that one of the top online lenders (Lending Club, SoFi, Prosper, OnDeck, or Avant) will be acquired, and he believes a major platform will be hit by a cyber attack. Like everyone else, he believes the tech giants will solidify their positions in alternative lending, and more interestingly, he says messaging apps will integrate with online lending platforms.
Krista Morgan (CEO, P2Binvestor) makes predictions for MPL sector:
- Companies will shift their focus on business models and unit profitability as hiring and spending decrease.
- Mergers and shutdowns will continue as equity investors remain absent. She thinks it will be a tough year.
- Investors believe the market is set for a correction; therefore, they will be looking at short duration assets for deploying their capital. Platforms will have to shift their focus to product development.
- 2018 will be the year of increased diversity.
Adam Stettner (Founder and CEO, Reliant Funding) predicts a year of instability. He also believes market variables will counterbalance themselves this year. The Fed is expected to increase interest rates, which will have a ripple effect in terms of rates for various types of loans. If unemployment levels remain low, it will lead to wage inflation. So the order of the day for alternative finance and small business funding companies will be adaptability, he says.
Additionally, Stettner sees a year of increased fraud, and companies will have to invest in identification tools and fraud detection techniques.
Two more predictions he points to are increased consolidation as companies overextend themselves and more disruption from big business names entering the space.
The Motley Fool is predicting a Lending Club stock price turnaround.
Juan Tavares (LendingPoint) predicts balance sheet lenders will take over, there will be more collaboration, and payments and credit will intersect more.
Small Business Lending
Trevor Dryer (Co-founder and CEO, Mirador) made predictions on small business lending:
- Banks will continue to increase small business lending and alternative lenders will struggle.
- Crowdfunding got a boost last year when Title III of The Jumpstart Our Business Startups Act (JOBS Act) was implemented, opening the gates for crowdfunding. Dryer believes this sector will thrive in 2018.
- Alternative lending has removed physical barriers that makes the lending process faster and more convenient. Alternative lending will continue to be more inclusive and encourage more people to start businesses.
- Legislative barriers will continue to fall.
- Alternative lenders will focus on experience and relationship building. Companies able to streamline and automate the application processes will thrive.
Alternative Lending in India
Rajesh Gupta (Founder and CEO, Cash Suvidha) made the following predictions for the Indian alternative lending market.
- A significant increase in alternative lending market share.
- Favorable regulations, cash benefits, ease of usage, and increased internet and smartphone penetration.
- Investors and venture capitalists will remain optimistic about the Indian alternative lending industry since it is the second most funded segment in Indian fintech.
“2018 will witness a transformation in the Indian financial landscape, all thanks to alternative lending,” he writes.
Traditional Financial Services and Alternative Investing
Kevin McPartland (Greenwich Associates) says 2018 will be the year of digital. He believes product-agnostic investing will be huge, and passive investing will gain on active investing. 2018 will also be the year that alternative data goes mainstream, he believes while data will be more important than trading. He also believes wealth management will “come out of retirement” and, finally, a ton of innovation in the financial markets as banks focus on crypto.
Chris Skinner (The Finanser Blog) writes a lot about banking’s reaction to alternative lending. He believes 2018 will be the year of artificial intelligence for banks and that banks will continue to drive digital technology deeper into their core systems. Not surprisingly, he also predicts that banks will develop more proof-of-concept operations for distributed ledger technology. Finally, he predicts the banks will develop an Enterprise Data Architecture this year to clean up their fragmented systems.
Alexander Prokhorov (FinSight Ventures) made some general predictions for fintech that apply just as well to alternative lending:
- Software will converge with financial products in the U.S. and Europe
- Insurtech will be more prominent
- Artificial intelligence will transform financial services
- There will be a lot of innovation in emerging economies such as Africa, Latin America, and Asia
- Wealth management will pick up speed
- Crypo assets and blockchain will take center stage for retail investing
Mitek believes 2018 will be the year of the cyber criminal and predicts there will be 150 million attempts to set up fraud accounts this year.
Don Steinbrugge, CFA (Founder and CEO, Agecroft Partners) is predicting a banner year for the hedge fund industry. He believes hedge fund assets will reach an all-time high for the 10th straight year. He also believes there will be an increase in hedge funds shutting down. And there will be an increase in cryptocurrency funds. Strategies that will gain assets, he believes, include:
- Asia long/short equity
- Those that blur the lines between private equity and hedge funds
The Lending-Times Prediction
Allen Taylor (Editor, Lending-Times) believes more U.S. platforms will open the doors to non-accredited investors. Blockchain will feature more prominently in alternative lending with more platforms focused on crypto-lending including a prominent alternative lender adding cryptocurrency to its list of core services. He also believes increased specialization will lead to platforms targeting specific industries, regions/states, and other narrow target markets.
2018 will surely see the alternative lending industry enter a consolidation phase to withstand the changes in market dynamics, and companies best able to cope with these headwinds would emerge bigger and stronger.
Written by Heena Dhir and Allen Taylor.