Millennials are the first generation to have grown up with access to the Internet and technology for their entire lives. They have done their homework on it, taken classes, and accessed all of their information through it. So, it is no stretch for millennials to search for and obtain their financial tools online.
As this generation of technology-dependent young adults transition from being college-aged borrowers to members of the larger financial world, how have consumer lending and marketplace lending kept up with their demands? In turn, how has this impacted the asset backed securities market?
SoFi and The Rise of “Alternative Lending”
The millennial generation’s dependency on technology has made it necessary for financial services to advance to their level of online convenience. This lending, known as marketplace lending, is really a revival of an old concept: people lending money to other people or peer- to peer lending sometimes abbreviated as P2P. As a response to the global financial crisis, it has re-emerged due to a number of factors. Incredibly low interest rates combined with an abundance of venture capital and the prevalence of crowd sourcing created the perfect conditions for this type of lending. As this type of lending has grown, many other businesspeople have begun to use it no matter their age, especially those with “riskier” businesses (such as technology) or those who have difficulties getting approved for conventional loans.
San Francisco-based Social Finance, or “SoFi,” and other marketplace lenders are an answer to the financial needs of millennials. For one, they are able to provide student loans online. According to CEO Mike Cagney, SoFi, with the help of an underwriter, is able to bundle these student loans into student loan asset-backed securities (SLABS), then sell them to investors. Securitization then helps by driving down the cost of funds, which in turns lowers loan rates and attracts more customers.
However, the asset-backed securities and student loan financial markets are still rather sensitive areas of finance after the financial crisis. The Dodd Frank Act had some sweeping reforms in ABS, including risk retention and Regulation AB II, which requires more loan-level information for some asset classes. Auto loans are a good example of this. It is interesting that student loans were exempt from this regulation. However, investors suffered major losses in certain sectors within the ABS world during the crisis. Going forward, the lack of a guarantee on how these loans will perform should another crisis arise is another sensitivity that must be considered.
Online Marketplace Lending in the Future
Although it is only a small part of the overall lending market, marketplace lending is the fastest growing sector of asset-backed securities and is continuously evolving as the need grows. According to the U.S. Dept. of Treasury, “Market analysts identify a $1.0 trillion addressable market for online marketplace lenders (excluding mortgages), and estimate loan origination volumes could reach $90.0 billion by 2020.” Online marketplace lending may be a helpful innovation, but it is also a risk; there is the potential for fair lending violations and disparate impact.
While we cannot predict exactly what will happen with online marketplace lending, we do know that things are only going to advance from here. In this new world where technology bridges access to capital to all people, all locations, all of the time, it is important that you don’t get left behind. Stay ahead of market trends by understanding and implementing the latest strategies and market positions in the online lending, crowdfunding, and asset-backed securities marketplace.
At GFMI, we offer Asset-Backed Securities/Securitization Training as well as Crowdfunding and Online Lending training to help you navigate these newer financial frontiers. For more information, please contact us to explore your training options.