Orchard Marketplace is a platform uniquely positioned at the intersection of institutional money and online lending. If you are a large investor, you use Orchard to manage and access loans on all lending platforms in the market. This perspective means Orchard can easily monitor historical trends in the lending industry online and extrapolate that information to provide a glimpse into the future. In the first half of 2016, the economy stuttered and online lending felt the impact of increased perceived risk as investors pulled back. This was contrasted by an increase in demand from international investors for US credit, including customers in China, Europe and elsewhere.
Crowdfund Insider recently met David Snitkof, Orchard Co-Founder and Chief Analytics Officer. Snitkof excels in data interpretation and technical analysis. As the media has recently focused on all the challenges of the lending industry in the market, we decided to ask for an internal perspective.
Crowdfund Insider: How is the first half of the year going for the online lending industry from your perspective?
David Snitkof: So far, 2016 has been a deviation from the continued upward trend in online loan growth that we have seen over the past few years. In addition to slowing growth, there have been a series of tightly clustered ‘bad news’ stories that have led some observers to question the long-term potential of the entire online lending movement. . While some naysayers were happy to call the whole thing some sort of naive mishap, this view couldn’t be further from the truth. The internet was not dead after the dot-com bubble, and Amazon did not abandon its innovative business model to try to become Walmart after its shares fell sharply in the years following the IPO. Turbulence is to be expected in any emerging industry, and we are already seeing some of the uncertainty starting to dissipate.
From my point of view, the first half of 2016 proved to be decisive for online loans, further reinforcing the fundamental truths of our industry, including greater access to credit, better customer experience and dramatically increased transparency. The unfortunate events of the past few months have been a learning time for online lending and I am happy to see that many participants have taken this opportunity to raise the bar even higher.
Crowdfund Insider: Are you seeing systematic changes or new trends? What about Prosper and the Lending Club setting up funds to buy loans?
David Snitkof: It is not surprising that the initiators are trying to diversify their capital structure. In terms of having an internal fund, Lending Club has had LC Advisors funds for several years now. What remains to be seen is whether capital allocators will trust a loan originator to be an impartial steward of their assets rather than allocate to a third-party manager. One trend that I think we’ll see is flexibility on the part of originators in terms of the deal structure and terms with investors. Over the past two years, initiators have been flush with investor demand and could force compliance with their preferred terms. Today, these originators are more willing to be flexible with investors who agree to fund their loans. There is a lot of work to be done on innovation in funding models, which is a priority for us at Orchard.
Crowdfund Insider: After a difficult Q1 and Q2, how do you see the sector evolving in the second half of the year?
David Snitkof: The news cycle has started to slow down for many of the negative headlines in early 2016, so I expect the way to be cleared for positive developments. In particular, there is a good chance that the underwriting recalibration and more restrictive loans of early 2016 will translate into strong performance for the vintages recorded at that time, and investors can see this reflected in their performance. However, I believe that the freshly smitten market players will generally be slower to adopt new investment products and new transaction structures than they were before.
What I hope I don’t see is a shift in the “think outside the box” mentality of pioneering space companies in favor of more traditional business models. Companies that attempt to revert to traditional credit market practices will find it difficult to compete on the same playing field with more established, better capitalized banks and other lenders. Ultimately, companies that can continue to be creative and innovative through the ups and downs of market cycles will be the most successful and disruptive in the long run.
Crowdfund Insider: Are the platforms you work with concerned about credit demand?
David Snitkof: Absoutely. Whatever the particular business model of any lender, lending is fundamentally a capital intensive business. For originations to continue to grow, originators will need to have access to ever larger and more stable sources of capital. The problem is, these buyers have very high standards for due diligence, data quality, and operational risk, and relatively nascent originators will need to take the time to demonstrate their ability to meet those standards.
Crowdfund Insider: You previously said you saw a slight uptick in international investors for US credit. Can you elaborate?
David Snitkof: The prolonged period of low returns around the world has made the desire for strong returns at reasonable risk even more insatiable. Fixed rate term loans issued by US online lenders to consumers and businesses are an attractive product for international investors seeking such returns.
In addition to the continued enthusiasm of European investors, we have seen a strong interest from Chinese wealth management companies to invest in US credit, as evidenced by notable US-China partnerships such as those between DriveWealth and CreditEase. , Robinhood and Baidu, Saxo Bank and Shanda Group’s growing stake in Lending Club.
Crowdfund Insider: What about upcoming regulatory worry for the online lending industry?
David Snitkof: There is a common misconception that the online lending industry is unregulated, when in fact it is. Originators have either state banking licenses or partnerships with nationally chartered banks, and their lending activity is subject to the same fair credit assessment and consumer protection laws as with businesses. more traditional. Either way, various regulators are taking a closer look at online lending as it becomes a bigger part of the US financial system. Much of the advice so far has focused on transparency, liquidity and access to credit, all of which are very much in line with our goal at Orchard.
Crowdfund Insider: You deal with many global platforms. How are the other regions doing?
David Snitkof: We continue to witness an exciting expansion of global online lending – observing the growth of new entrants into the space and notable advances from existing players. The Orchard Originator Database, for example, which provides an efficient way for investors to discover top originators in a wide range of global asset classes, contains more than 60 non-U.S. Originators, representing almost a third of all. the participants. We are delighted to observe the growth of the global market and look forward to working closely with our international partners.
Crowdfund Insider: Orchard was present in China at Lendit. Do you expect significant growth from this region?
David Snitkof: We have seen great interest in US online loans among Chinese companies and are fortunate to have several clients and partners in China already. For example, we have partnered with CreditEase to produce some of our research on the US market in Chinese. We expect greater growth in Asia, especially as investors continue to view US credit as a stable and attractive asset.
Crowdfund Insider: An Update on the Secondary Market?
David Snitkof: The events of this year have reinforced our long-held belief that liquid and transparent markets are essential for the future of online lending. This is true for both primary and secondary transactions. Our team has made great strides, both in terms of legal / regulatory issues as well as core market technology, and we are heading for a very exciting launch later this year.