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Innovative online lending is changing the industry

August 22, 2016

By Mark Zeigler

Online lending is under fire, as Senate Democrats last week called for the regulation of the industry in a letter to various government bodies, including the Consumer Financial Protection Bureau.

To get some clarity on issues surrounding online lenders, Benzinga caught up with Glenn Goldman, CEO of the small business lender Credibly.

Goldman spoke about the depiction of lenders in media and the impact of the industry on the American economy. An edited transcript of the conversation is below.

What are some of the myths surrounding disruption in the lending industry?
What we’re seeing today is innovation and disruption not around a particular slice of the credit spectrum, but around user experience and the availability of capital.

After the bust of the first Internet bubble, folks did not go back to using fax machines. The fact is, what the lending industry has done in terms of creating a far superior user experience — following on how gaming, social, travel, and virtually every other industry has moved online — has created an opportunity to get more capital to the folks who need it and lowering people’s cost of funds along the way.

[Another myth I see] is the demise of innovative lending. But I just want to spend a second talking about what I mean by “innovative lending.” We as an industry have been challenged in coming up with what we should be calling ourselves. “Peer-to-peer,” in the early days, captured the essence of what the models were about in many ways, but that quickly evolved to perhaps institutional-to-peer. “Marketplace” implies that there’s a pure marketplace that’s operating, matching up borrowers and lenders in a hands-off kind of way. But that also implies a singular source of financing; that the financing for those individual loans comes from “the marketplace.”

So what makes “innovative lending” a better description of the category?
I think what we’ve seen over the last six months or so is really a convergence of all these models, that whether you call yourself a marketplace lender, a peer-to-peer lender, even an online lender — probably less than 40% of online lenders actually originate their business online — they all seem to try to define something that is evolving.

In fact, trying to define a lending model by how you finance it belies the fact that platform should have access to multiple sources of financing. And so I do want to give a quick shout out to the ILPA, the Innovative Lending Platform Association, for coming up with a name and approach that really defines what we do, which is all about innovation.

Again, we watched social, gaming, travel, and music, all go through significant innovation. Lots of capital helped to fund a number of very interesting business models, and it ended up that they were not all perfect business models. There was a thinning of the herd. All of our lives are now changed in how we interact with each of those product and service offerings, as has our lives been changed by having access to capital if you’re a small business, and lowering your cost of capital if you used to pay 25% on revolving credit. So I don’t think innovative lending is going anywhere, it’s just going through the process of getting stronger.

What’s something that isn’t discussed enough in the lending conversation?
I talk a lot about the importance of having diversified sources of funding available to you regardless of how you originate assets. I typically look to categorize them into on-balance sheet, whole loan sale, and securitization, and there are variations on each of those. Some are permanent and some are not. Some are committed and some are not. And while we are starting to see the creation of funds that are truly permanent in nature, in that their mandate is very specific to invest in assets originated by platforms, it’s going to be really important for platforms to also avail themselves of committed capital.

Credibly was born as an on-balance sheet company, so by definition we had committed capital. It requires you to really get your mind right about the value and importance of data science and risk management. For this industry to continue to thrive, buyers and investors in loans are going to need to see platforms with a stronger incentive to make sure that those areas of business are well-developed.

Can you tell me more about the popular view of online lending and the innovative lending industry?
I had an opportunity to be on a panel a couple of months ago, and we were talking about how folks were predicting the demise of innovative lending, and that the the challenges that the industry was facing was a sign that it was just a really bad idea. And the fact is that for the five or 10 years leading up to that panel a couple of months ago, this industry of ours has helped reduce the cost of funds to consumers by probably hundreds of millions of dollars.

What’s the impact of that?
Those savings either go into true savings or go back into the economy. And over that same period of time, providers of capital to small business have made sure that small businesses that historically weren’t able to access capital were able to access capital.

Those funds are used to open new locations and hire people — we all know that small businesses represent roughly 60% of GDP and roughly 60% of our labor force — and during the short time we’re sitting here today, our industry will probably do more of that to the tune of $10 million to $20 million. There’s a significant social benefit that we’re helping to create, and none of what we’re reading about in the press is going to change any of that.

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