NEW YORK (Reuters) – US online lenders such as LendingClub Corp, Kabbage Inc and Avant LLC assess loan quality, secure long-term financing and cutting costs, as managers prepare what they fear may be the sector's first economic downturn.
FILE PHOTO: Renaud Laplanche, (2.R) Founder and CEO of Lending Club, celebrating with corporate executives after calling the opening bell during their listing on the New York Stock Exchange (NYSE) in New York, USA, December 11, 2014. REUTERS / Brendan McDermid / File Photo
A recession can lead to increasing losses on credit, liquidity violations and higher financing costs, testing of business models in a relatively nourishing industry.
Peer-to-peer and other digital lenders largely spread after the major recession in 2008. Unlike banks, which tend to have cheaper and more stable deposits, online lenders rely on market funding that can Be harder to get past in times of stress.
Their signature methods also often include analysis of non-traditional data, such as educational level for borrowers. While platforms see it as a strength, it has not yet been tested in times of crisis.
"This is very good for us," says LendenClub, CEO Scott Sanborn, 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 some half dozen other online lenders who spoke to Reuters say that worsening economic indicators and forecasts have made them more cautious.
Their concerns are the last sign that fears that a downturn in the US is close to growing. Economists polled by Reuters in March saw a 25 percent chance of US recession over the next 12 months. More recently, some leaders, a Federal Reserve decision to stop interest rates, said these fears intensified.
"We saw economists up some warning signs, and we followed the Fed signals, and they became more stupid," said Bhanu Arora, head of consumer loan to Chicago-based lender Avant. "We wanted to be prepared and ready."
To better position itself for recession, Avant came up with a plan late last year that includes tightening credit requirements for segments identified as higher risk, Arora said.
Insurance managers said they do not yet see clear signs of problems in their loan books.
A decline is also far from certain. On Friday, JPMorgan Chase & Co, the country's largest bank of assets, increased the fear of a recession after it had outperformed expected quarterly earnings driven by solid US economic growth.
However, if a slump hit, it will separate the stronger online lenders from the weaker ones.
"All these different platforms say they can guarantee 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 may have taken shortcuts."
In February, LendingClub, one of the pioneers of peer-to-peer lending, offered growth forecasts for 2019 that were short of Wall Street expectations, partly a sign of increased caution. LendingClub does not provide loans directly to consumers but earns fees by connecting borrowers and investors to its online marketplace.
Sanborn said the company has become stricter about credit standards for borrowers on the platform and attracts investors with greater risk appetite if the more cautious participants withdraw.
There are also outsourcing several of their back-office operations and moving some employees to Utah from San Francisco to reduce expenses, he said.
SoFI, an online lender that refinances student loans and then securitizes them, has focused on making the portfolio more profitable, although it may mean lower volumes of origin, CEO Anthony Noto said in late February.
ADDITIONAL CUSHION Some companies build more space on the balance and try to secure funding further into the future.
Small Business Lender BlueVine Capital Inc, for example, is seeking long-term credit facilities. Given the choice to pay 10 basis points less or get an additional credit for a year, BlueVine would choose the latter, said Eyal Lifshitz, the company's CEO.
"We make sure we lock in the capital for long periods, and from providers we trust and we know are going to be around," said Lifshitz.
BlueVine offers invoice factoring, where companies exchange future cash flows for current financing, as well as credit lines that last up to one year. It is postponing the launch of long-term products because of financial concerns, Lifshitz said.
Atlanta-based Cabbage, which provides loans to small businesses, has recently completed a $ 700 million equity-based securitization. The company said it was increasing funding to meet growing borrowers' demand, but also partly in preparation for the deterioration of economic conditions.
"We've been waiting for the next recession to happen over the last five years," said Kathryn Petralia, co-founder and president. "More people feel convinced it's imminent."
Editing Lauren Tara LaCapra and Paritosh Bansal