NEW YORK (MainStreet) — At the recent LendIt Conference, leaders from the world of online and marketplace lending convened to discuss the future of their industry. And from the looks of it, online lending is a burgeoning business, primed to capture significant market share in coming years. By virtue of their youthful, tech-savvy demographic, student loan refinancing and lending companies, such as CommonBond and SoFi, are leading this trend. With rapidly growing originations, these companies are now expanding beyond student loans to a variety of other loan products.
New Loan Products
Already, SoFi has entered the mortgage business – a move that may contribute significantly to the company’s growth projections. SoFi expects to originate about $4 billion in loans in 2015 alone, as compared to about $2 billion since its launch in 2011. Mike Cagney, CEO of SoFi, says this foray into mortgages mirrors their customers’ growing needs.
“We want to grow with our customers," he says. "As the Millennials grow older, we want to continue to be their lender of choice, and offer products that make sense for their life stages. That’s where our new mortgage offerings come in.”
David Klein, CEO of CommonBond, shares a similar vision of lending product diversification. The company expects to surpass $500 million in loans in 2015 and about $1 billion in 2016.
“Student loans are where we started, but it’s not where we’re going to stop," he says. We’re developing a level of trust with our customer that we hope will enable us to provide them with additional lending over time. Our mission is to follow our customer, and what that will mean is going into other credit products, whether it’s mortgages, personal credit or even asset management.”
Following the Millennial Money
Though much has been written about the financial woes of the Millennial generation, SoFi and CommonBond are banking on their financial future for their own success. For now, the focus is on providing financial products for a select group of Millennials – college-educated and typically higher-earning. As Klein says, “Our platform is underwriting a a group of borrowers who are creditworthy, with average FICO scores of over 700, and with a relatively high household income, with an average age of 31 who have some past credit, but have a lot of financial life ahead of them. As their financial needs evolve, we want to be their lending platform of choice.
But the fact remains that these companies' platforms, loan offerings and technologies remain closely tied to Gen Y and the earning capacity of that generation. And much of their success can be attributed to their ability to serve that demographic so astutely. SoFi’s Cagney says his company’s originations now place them second in the alternative lending industry, only behind publicly traded marketplace lending behemoth, LendingClub, which has nearly an $8 billion market cap.
“I think, frankly, that the jury is still out about whether traditional lenders and marketplace lenders will be great partners or great competitors," he said. "I do see a world in which partnership between traditional and emerging finance makes finance better for the young consumer."
Sure, traditional finance brings liquidity and scale – capital at low cost, in big sums, sustainably, over time.
"But emerging lenders provide agility and speed, service platforms, prices, and technology that traditional players can’t currently match,” Cagney says.
Yet if SoFi’s originations are now second only to LendingClub’s, its ambitions are even larger. Asked about a potential upcoming IPO, Cagney says he intends on entering the public market when SoFi is poised to be first in the marketplace lending business. As for CommonBond, its expansion into new products could also include asset management – a potentially huge source of new revenue. “The folks over at Betterment – we love what they’re doing, and they’re partners of ours now," Klein says. "We think we have a role to play in that industry. When you think of our customer, you realize they’ll have other needs over time, such as asset management. Whether as a partner, or in another capacity, we think CommonBond’s platform has a huge role to play in this business.”
Partnerships are playing an increasingly large role in the growth of some marketplace lenders. For some, like LendingClub, partnerships with major traditional banks have proven beneficial in expanding reach. And Klein says that partnerships with traditional lenders, such as CommonBond's collaboration with Nelnet, can both benefit the business and better serve consumers' needs.
But Cagney has a clearer vision.
“Traditional lenders are my competitors," he says. "We want their market share.”
--Written by Janet Al-Saad for MainStreet