NEW YORK (Reuters) – Online lenders in the US, such as LendingClub Corp., Kabbage Inc. and Avant LLC, are reviewing credit quality, securing long-term financing and lowering costs as executives face a potential economic downturn in the sector to prepare .
FILE PHOTO: Renaud Laplanche, (2nd R) Founder and CEO of the Lending Club, celebrates with corporate executives after ringing the opening bell on December 11 during his New York Stock Exchange (NYSE) IPO in New York, USA , 2014. REUTERS / Brendan McDermid / File Photo
A recession could lead to rising loan defaults, liquidity shortages, higher financing costs, and testing business models in a relatively new industry.
Peer-to-peer loans and other digital lenders have essentially emerged after the Great Recession of 2008. Unlike banks, which tend to have cheaper and more stable deposits, online lenders rely on market financing, which may be more difficult during periods of stress.
Their underwriting methods often include the analysis of non-traditional data, such as the level of education of borrowers. Platforms see this as a strength, but still have to be tested in times of crisis.
"This is very important to us," said Scott Sanborn, LendingClub's Chief Executive Officer, in an interview, referring to the possibility of a recession. "It's not a question of 'when', 'when', and it's not five years away."
Sanborn and executives of about half a dozen other online lenders who spoke with Reuters said that economic indicators and forecasts had deteriorated more cautiously.
Her concerns are the latest sign of fears of a downturn in the US. Economists interviewed by Reuters in March saw a 25 percent chance of a US recession over the next 12 months. Recently, some executives said a Federal Reserve decision to stop raising interest rates fueled these fears.
"We saw economists raising warning signs, and we followed the signals from the Fed and they became rather negligent," said Bhanu Arora, head of consumer credit at Chicago-based lender Avant. "We wanted to be ready and ready."
In order to better position itself for the recession, Avant submitted a plan at the end of last year that would tighten credit requirements for higher-risk segments, Arora said.
The managers said they did not see any noticeable signs of problems in their rental books.
Even a downturn is by no means certain. JPMorgan Chase & Co, the largest bank in the country by assets, eased fears of a recession on Friday after quarterly gains outperformed growth, which was considered to be solid economic growth in the US.
However, if a downturn sets in, this would make the stronger online lenders different from the weaker ones.
"All these different platforms say they can sign in a unique way," said Robert Wildhack, an analyst at Autonomous Research. "This is the first chance we have to see who is right and who may have taken shortcuts."
In February, LendingClub, one of the pioneers of peer-to-peer lending, offered growth in forecasts for 2019 that failed to meet Wall Street expectations, in part a sign of growing caution. LendingClub does not provide consumers with direct loans, but earns fees when connecting borrowers and investors to its online marketplace.
Sanborn said the company had stricter credit standards for borrowers on its platform, and attracts investors with a broader risk appetite if the more cautious participants withdraw.
He also moves more of his back-office activities and moves some staff from San Francisco to Utah to cut costs, he said.
SoFI, an online lender that refinances and then securitises student loans, has focused on making its portfolio more profitable, although this could mean lower origination volumes, CEO Anthony Noto told reporters at the end of February.
ADDITIONAL CUSHIONS Some companies are building more leeway in their balance sheets and trying to secure funding for the future.
The small lender BlueVine Capital Inc., for example, looks for long-term credit lines. BlueVine would make the decision to pay 10 basis points less or get an additional line of credit for another year would opt for the latter, said Eyal Lifshitz, the company's chief executive.
"We ensure that we secure capital for a long time and from providers we trust and know that exist," said Lifshitz.
BlueVine offers factor pricing, where companies exchange future cash flows for on-going financing and up to one-year credit lines. The introduction of longer-term products will be postponed for economic reasons, Lifshitz said.
Kabbage, an Atlanta-based loaner to small businesses, recently completed a $ 700 million asset-backed securitization. The company said it had raised funds to meet the growing demand of borrowers, but also to prepare itself in the event of deteriorating economic conditions.
"We have been waiting for the next recession in the past five years," said Kathryn Petralia, co-founder and president. "More and more people believe that it is imminent."
Edited by Lauren Tara LaCapra and Paritosh Bansal