Is P2P falling to PfailsP?23 Aug 2016
The shares of Lending Club have fallen 65% since beginning of year. The tapered growth, forced resignation of CEO at beginning of month and now subpoena by the regulators, things are not going as per the plan. Lending club is not alone in the P2P lenders space but others in the segment have shown similar stress. It is a high risk game, which need more/ better controls and risk assessment. These platforms serve an unfilled need in the macroeconomic environment, as Robert J Jackson writes in Bloomberg, ‘These platforms provide needed credit to millions of Americans. And recent legal developments have already begun to choke off the supply of marketplace credit to borrowers who need it most. In 2015 alone, marketplace lenders arranged more than $15 billion in loans. According to the May 10 Treasury report, most of the borrowers used the proceeds to pay down higher-cost sources of debt like credit cards.’
Shares of On Deck Capital Inc., an online P2P lender focused on businesses have dropped 52% this year. The company recently told investors its revenue grew less quickly than previously thought. Square Inc., which lends to businesses, is down 25% this year after falling 3.6% Monday. The online-payments company run by Twitter CEO Jack Dorsey has said its lending business was getting off to a slower start this year than expected.
These firms which had shown splendid growth for last few quarters, the growth now seems to taper out. Prosper originated $973m of loans in the first quarter, down from $1.1bn. It expects another fall between April and June. Lending Club, revenue growth is slowing from its current rate of 93 per cent, year-on-year. Analysts expect revenues of $148m for the first quarter, up 83 per cent from a year ago. The market has gone from disruption to growth to a bit of a saturation point. Some say that it is natural to see a slowdown after years of hectic expansion. These P2P companies are still showing growth but a tapered down, it is becoming a challenge as investors are seeking for higher returns which these companies are not able to provide. With the recent issues with lending club, the crisis seems to worsen.
Renaud Laplanche was forced to resign from Chairman and CEO. His resignation was post an internal review of sales of $22 million in near-prime loans to a single investor, in contravention of the investor’s express instructions as to a non-credit and non-pricing element. This has been accentuated due to fall in share price and tapered growth. As per results declared beginning of month, company refused to provide an outlook and informed that it will be provided later.
Controls and risk management will be the fundamental to build a long term sustainable financial business. At the early stage, the NPA can be controlled through growth but with tapering growth, the impairment indicators will worsen and investors will ask for higher growth and reduced impairments. The cost of fund will always be a challenge and all financial institutions will have to look for long term capital solutions, unlike dependent too much on equity.
The new age financial institutions will have to choose selective fields/ areas which are not serviced by the regulated banking system. Like a company in US is focusing on elective surgery market and building a whole financial solution around it.
Competition often best protects the customer; hence we should not join the marketplace critics’ bandwagon. P2P was a fresh breath of air, bringing positive results to customers on both side of the financial institution, lenders and creditors. The model will certainly go through improvement phases and will prove to be a catalyst in the economic growth.