[Editor’s note: This is a guest post from Joshua Schnoll, Director, Product Marketing at FICO. FICO is a bronze sponsor and will be in attendance at LendIt USA 2015 on April 13-15. In this post, he talks about millennials and alternative lending going mainstream.]
Recently I heard a “soft rock” version of Nirvana’s Smells Like Teen Spirit. As shocking as that was, it got me thinking a bit about how over time “alternative” things go mainstream. In the banking context, peer-to-peer or non-bank lenders are still “alternative” and they still represent a very small part of the >$3T overall US consumer lending pie (Federal Reserve, 2014), but it is growing by the day.
Lending Club issued $1.4B in new loans in the final quarter of 2014, and Prosper hit a total of $2B loans originated through its platform in Oct 2014. Kabbage, recently hit a $3M per day in new originations to small businesses, just five months after announcing the $2M per day milestone. FICO consumer research found that Millennials could be a strong source of growth for these institutions going forward as well. Peer-to-peer lenders are attractive to Millennials (18-34 years old) with 23% indicating they are already using or very likely to use a peer-to-peer lender in the next 12 months vs. those over 50 at just 2%. That said, the same study showed that consumers have lower perceptions when compared with traditional banks in areas like security of transactions and overall trustworthiness.
Traditional banks aren’t sure if these players are friend or foe. Last May, Union Bank and LendingClub entered a strategic partnership where Union Bank will purchase personal loans from LendingClub and will collaborate with them on new products to both their customer bases. Several community banks have also joined forces with alternative lenders. Wells Fargo, on the other hand, banned, then allowed it employees to invest in peer-to-peer lending sites.
Modern platforms and strong technology investments give alternative lenders the ability to mine new data sources for insights on risk and customer behavior, and to react quickly to market changes. One of the big wild cards for these lenders is where worldwide regulators are going. At FICO, we feel that these lenders not only need to invest in the right systems to keep them agile, but also need to prepare for the inevitable set of regulation that will come. The July 2011, the US Government Accountability Office report on peer-to-peer lending set the stage, offering up a series of options for future regulation.
At FICO we work with a number of alternative financing providers to help both small business and consumers access credit. We recently launched an Alternative Lending Platform in China with 11 leading peer-to-peer lenders. Kabbage is one of those firms and they focus on a constant flow of data from small businesses (eBay/Amazon/Etsy transaction records, payment data from PayPal, Square, Quickbooks or business checking accounts, social data from Facebook or Twitter are a small sample) to make smarter and low cost funding decisions. The platform they have created is not only agile, but also ready for what market or regulatory changes may come.
While we might not see peer-to-peer lenders overtaking traditional banks this year or next, the “alternative” label will soon be shed. I never thought I’d hear “soft rock” Nirvana, that only took 20 years, I’m guessing in lending it will be much sooner.