We have all heard, probably even used the phrase, “one bad apple spoils the barrel.” Alternative lenders have been on the defense of that thinking recently, since a shakeup with Lending Club this past year.
Under investigation for questionable lending practices, a lack of transparency, and personal investments by Lending Club’s founder and then-CEO Renaud Laplanche
that suggested a conflict of interest, the company has taken hits–both financially, and to their once-solid reputation.
A peer-to-peer lender, Lending Club facilitates the borrowing of money of either an individual or business, using an online platform, from either peers or institutional investors. One of many alternative finance companies that have grown from the financial crisis of 2008, Lending Club has been a pioneer in the industry. Moreover, now they have put it on the hotspot.
Experts and lenders within the industry have used the spotlight as a way to both defend alternative lending and strengthen the industry. Ryan Weeks, the editor of an industry standard news outlet, AltFi News, recently said this in his defense of alternative lending on Techcrunch.com:
“Alternative lending (I’ll use this term to encapsulate both the balance sheet and marketplace varieties) is fundamentally about plugging excess liquidity directly into innovative sources of loan origination. The internet acts as the connector, facilitating a more seamless transmission of money.”
It’s because of the internet that these assets can be opened up to a broad range of investors, from thousands of individual investors to a smaller number of institutional investors. But beyond that, the internet also allows for the more intelligent pricing of risk.”
“These statements are supported by the actions of some of the world’s best-known financial services brands, which have been selectively adopting various aspects of the alternative lending model over the past few years.”
What he’s talking about is opportunity made available through technology. When used for good, businesses looking for capital for their operations, entrepreneurs hoping to secure cash to launch their innovative startups, even individuals looking for a financial boost in an insecure time, can access funding quickly, with little paperwork, few hoops to jump through, and without a lot (or any) collateral or even strong credit or stability in business.
Shady practices, like the ones Lending Club is was under investigation for, provide greater shade on the industry as a whole, and that is not particularly fair. However, life is not fair (how many times did you hear that growing up?) and rather than let unethical actions taint the industry, there becomes an opportunity for growth. Namely, focus on transparency.
Writes Ruper Taylor in a post on AltFi, ” Not correctly disclosing full details of what a client is purchasing is a colossal failing in any financial business. But in a disruptive new financial industry, which seeks to set itself apart in the field of transparency, it is unforgiveable.”
However, simply re-regulating the financial reporting of alternative lending companies–closing potential loopholes–is more difficult than penning a few new guidelines; yet herein this difficulty is the real opportunity for growth.
The growing role of analytics
Lending Club has originated over 1.5 million loans, so meaningful analysis, says Taylor, would require “significant computing power.” And because they are originators, not lenders, they’ve used a number of different platforms to provide their services. All things are not equal, so you can imagine the time and energy and analytic know-how from the institutional investors to contribute to meaningful analysis.
AltFi Data has launched AltFi Data Analytics, a tool that’s been two years in the making, to show standardized and comparable metrics for the four largest marketplace lending platforms in the UK.
The good news, says Taylor, is the “developing culture of transparency.” As new architecture is being built to move forward with analytics across the industry, transparency and disclosure are less moving targets and more bulls-eyes.
How to select a reputable online broker or lender
Lending Club might currently be a bad apple, but they have not poisoned the barrel. The industry has grown out of innovation, necessity, and good business practices. Unfortunately, like in any industry, unethical actions happen. Here are tips to find reputable lenders online.
Look for a secure website with a valid SSL certificate. Look for “https” in the URL and a lock icon, like this one:
Find a company with professionals who are willing to discuss terms and fees openly with you. If it’s difficult to talk with a live person, or your representative can’t put your terms into an understandable schedule, move on to a company who can. Additionally, don’t allow yourself to be rushed into signing an agreement. You should be free ask as many questions as you need before making your decision.
Don’t be pushed into borrowing more money than you need. Remain firm on the amount you have calculated and question a borrow who encourages you to borrow more.
Find the fine print or terms of agreement on your lender or broker’s website. You should be able to locate privacy policies and legal disclosures without having to ask for that information.
Borrowing money is a necessity for any business, and traditional banks are not always to the answer to short-term, quick turnaround situations. Thus the development of the alternative lending industry, helping individuals and business owners reach the funds they need to grow their businesses. And while growing pains sometimes cast a shadow, they help industry leaders make better, more transparent products for the marketplace.
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