Alternative lenders have been riding a roller coaster of late: The market reached a lofty peak in 2015, when, for example Lending Club reached a $7 billion market cap. However, that rise was followed by a rapid downhill drop, as evidenced by the 38% decline in the market value of On Deck Capital. Even more alarming, investors are now wondering about the viability of an industry that was expected to be a much needed source of long-term profitability and growth.
This volatility raises a fair question of whether Fintech lenders are truly technology companies that should be valued in a manner similar to online marketplaces. Or are they actually more similar to traditional banks than software companies.
Fintech lenders face a real trade-off relative to traditional banks – a much higher marginal cost of capital versus dramatically lower regulatory burdens. Importantly, these new players receive the benefit of picking up businesses that lost favor with banks due to the costs imposed by the regulatory bodies.
That said, investors shouldn’t ignore the very real challenges these lenders face. Much of their technology, in terms of both credit underwriting and operational policies & procedures, are untested through a full business cycle. Exponential growth rates, unless adroitly managed, can become as much of a curse as a blessing. And it would be a mistake to assume that increasingly well capitalized and long-term competitors will remain on the sidelines permanently.