Over the past four years, marketplace lending has grown by over 700%. Loan volume at 13 of the largest online lenders grew from a modest $2 billion in 2010 to a staggering $16 billion in 2014. As mission-driven and responsible lenders, we have a role to play in this new world. The good news? The business is out there. Association for Enterprise Opportunity (AEO) teamed up with D&B and in their research, they determined 2.2 million small businesses with revenues less than $1M, located in low income communities were seeking credit in 2014. The bad news? CDFIs were only able to help just over 12,000 of those businesses. As banks vacated the small business loan space (classified as loan amounts less than $1M), a rush of upstart technology-driven lenders flooded the market.
While loan volume is often quoted and circulated as a means to shock traditional lenders into paying attention, sometimes it pays to dig a little deeper. For example, in Lending Club and OnDeck’s public SEC filings, they report spending upwards of $232 million on sales and marketing in 2015. Others are following suit, spending millions on sales, marketing, technology and product development to grow their businesses. Online lenders use data-driven algorithms for loan decisioning, making it fast and easy for customers to get a loan.
In conversations with our colleagues, these trends provide pause for concern and pose a number of challenges for our organizations. A number of CDFIs admit to ineffective and costly marketing and customer acquisition efforts and unsustainable operating models. Others don’t track what they are spending to originate a loan while still others haven’t had time to stop and think about the efficiency of their operations. But, we all seem to wonder as we look at the changing landscape, “how will we continue to deliver on our promises to build strong communities with equitable access to capital and opportunity?”
What might it look like if we continue down the same path for the next few years? If we stay stuck, our business models will not adapt to the realities of today’s markets and customer preferences. We will continue to compete for increasingly scarce philanthropic resources. Access to capital will remain difficult for underserved borrowers and they will not have the many alternatives to predatory products we provide. Some of us may fail and others may consolidate.
The good news is that there is already a lot of work being done to create a new future, with CDFIs collaborating to find ways to increase our relevance and impact.
Conversations are happening around business models and how we reduce the cost of customer acquisition, improve customer experience, reduce the cost of loan origination and provide products and services that meet the needs of small business customers across the spectrum. We see a future where CDFIs will begin to collaborate to compete and take what many perceive to be our industry’s weaknesses and turn them into strengths. Working together, we can take the good parts of online lending and make them our own. We must, if we are to become a lender of preference and shed our current role of sweeping up after the predatory lenders have done their damage.