13.6 The road forward
The marketplace lending model is interesting and profitable under expected market, counterparty and behavior conditions, but it is far from complete. Vital components are missing, such as the ability to compensate lenders for losses under stress.
Banks could be part of the road forward in several ways. They could offer derivatives, they could be protection sellers by applying their own analytics to the asset class, or they could buy a part of the portfolios, for instance, highly rated loans that offer relatively modest interest. In terms of secondary market liquidity, banks could also play an important role in the evolution of the sector.It is possible to complete the business model for marketplace lending. Analytics in this analysis, which are described in Part Two of this book, are straightforward, and banks have the in-house talent to perform and deploy them. Marketplace lending platforms should take advantage of this know-how: by tapping into the banks' pool of experience, they could become stronger in their analytics and could become intermediators. This would change the positioning of marketplace lenders from the underdog to the next generation of credit institutions. Online originators have the potential to do what banks do, and more. Then—and only then—will they be competitors to established credit institutions. At the same time, the potential to make a bigger splash hinges on the collaboration of platforms and banking institutions. The maximal utility of the innovation in marketplace lending lies in its integration in the hybrid financial sector.
Analytics are the first low-hanging fruit for improving the operations of marketplace lending platforms massively. Platforms can certainly claim that providing analytics is the sole responsibility of investors, but if a crisis happens, platforms are the players in the game with most to lose. They would benefit from a unified analytics engine that works among all platforms. When this is in place, regulators will be able to plug in as well. This is an interesting opportunity for regulators to experiment with an innovative credit business model because the scale of marketplace lending is still relatively modest and platform businesses are new and their size manageable. This would not only reinvent credit, it would also reinvent regulation. Chapter 16 will focus on the hybrid financial sector in more detail.
13.7