U.S. online lenders such as LendingClub Corp, Kabbage Inc and Avant LLC are scrutinizing loan quality, securing long-term financing and cutting costs, as executives prepare for what they fear could be the sector's first economic downturn.
A recession could bring escalating credit losses, liquidity crunch and higher funding costs, testing business models in a relatively nascent industry. Peer-to-peer and other digital lenders sprouted up largely after the Great Recession of 2008. Unlike banks, which tend to have lower-cost and more stable deposits, online lenders rely on market funding that can be harder to come by in times of stress.
Their underwriting methods also often include analysis of non-traditional data, such as the education level of borrowers. While platforms see that as a strength, it has yet to be tested in times of crisis. "This is the very top of mind for us," LendingClub Chief Executive Officer Scott Sanborn said in an interview, referring to the possibility of a recession. "It's not a question of 'if,' it's 'when,' and it's not five years away."
Sanborn and executives at some half a dozen other online lenders who spoke to Reuters said worsening economic indicators and forecasts have made them more cautious. Their worries are the latest sign that fears a U.S. downturn is nigh are growing. Economists polled by Reuters in March saw a 25 per cent chance of U.S. recession over the next 12 months. More recently, some executives said, a Federal Reserve decision to halt interest rate hikes reinforced those fears.
"We were seeing economists bringing up some warning signs, and we were following the Fed signals and that they were becoming more dovish," said Bhanu Arora, the head of consumer lending at the Chicago-based lender Avant. "We wanted to be prepared and ready." To position itself better for recession, Avant came up with a plan late last year that includes tightening credit requirements for segments it identified as a higher risk, Arora said.
To be sure, the executives said they are not yet seeing glaring signs of trouble in their loan books. A downturn is also far from certain. On Friday, JPMorgan Chase & Co, the country's largest bank by assets, eased fears of a recession after it posted better-than-expected quarterly profits driven by what it described as solid U.S. economic growth.
If a downturn hits, however, it would separate the stronger online lenders from the weaker ones. "All these different platforms say they can underwrite in unique ways," said Robert Wildhack, an analyst at Autonomous Research. "This will be the first chance we have to see who is right and who might have been taking shortcuts."
In February, LendingClub, one of the pioneers of peer-to-peer lending, offered growth projections for 2019 that fell short of Wall Street expectations, partly a sign of growing caution. LendingClub does not provide loans directly to consumers but earns fees by connecting borrowers and investors in its online marketplace.
Sanborn said the company has gotten more stringent about credit standards for borrowers on its platform and is attracting investors with broader risk appetites in case the more cautious participants pull back. It is also outsourcing more of its back-office operations and relocating some staff to Utah from San Francisco to reduce expenses, he said.
SoFI, an online lender that refinances student loans and then securitizes them, has been focusing on making its portfolio more profitable, even if that may mean lower origination volumes, CEO Anthony Noto told reporters in late-February.
Some companies are building more room on their balance sheets and trying to secure funding farther into the future. Small business lender BlueVine Capital Inc, for example, is seeking credit facilities with extended durations. Given a choice to pay 10 basis points less or get a line of credit that lasts an additional year, BlueVine would choose the latter, said Eyal Lifshitz, the company's chief executive.
"We are making sure we are locking in capital for longer periods of time, and from providers that we trust and we know are going to be around," Lifshitz said. BlueVine offers invoice factoring, where companies exchange future cash flows for current financing, as well as lines of credit that last up to a year. It is postponing the launch of longer-term products because of economic concerns, Lifshitz said.
Atlanta-based Kabbage, which lends to small businesses, recently completed a $700 million asset-backed securitization. The company said it raised the funding to meet growing borrower demand, but also partly as preparation in case of worsening economic conditions. "We have been waiting for the next recession to happen for the past five years," said Kathryn Petralia, co-founder and president. "More people feel confident that it's imminent."
(With inputs from agencies.)