Thoughts From Lendit 2014

The Lendit 2014 conference happened earlier this month, and I was fortunate enough to participate. How far we’ve come since last year’s event in New York!

The big attractions to the show were Lending Club and Prosper. Lending Club continues its juggernaut growth, and seems destined for a successful IPO this year. Prosper has turned the corner under new management, and had the momentum of their first $100MM month in April and a nice $600MM pre-money valuation for a new round of financing. We’re trying to keep up at SoFi, funding $70MM in April and coming off our own $80MM equity raise in the same month.

One of the striking differences between this year and last year’s conference: the number of people. Judging by the number of bankers in attendance, it’s clear the idea of reclassifying peer-to-peer as marketplace lending that is heavily reliant on institutional money has legs. I have mixed feelings about this. SoFi was an early mover among alternative lenders to integrate both institutional and retail capital. Our warehouses, large bank participation and rated securitization were all firsts in the industry. However, we always valued the retail investor, and demonstrated our commitment by funding the majority of the equity in our first securitization with retail alumni dollars. I think there’s a happy medium here, and it will be established as the industry moves towards true marketplaces where prices are set by supply and demand.

There was significant discussion at the conference about Charles Moldow’s paper on the alternative lending industry. It’s an excellent write up, and I’m thrilled with the attention it’s attracted. I’ve got some strong feelings about two of the topics he covered: the role of banks in our space and what the real, disruptive opportunity is for alternative lenders.

As it relates to banks, we’ve always walked a fine line. We recognize our borrowers might not have the best opinion of the mega-banks, and we often play into that in our advertising and positioning. We also recognize that banks play an important role in our ecosystem and I would argue are the smartest risk/return investors in the space, and we welcome them as investors in our loans.

So why would a bank invest in a SoFi (or Lending Club or Prosper) loan rather than just compete to originate? Some feel it’s because of cost – that the banks have hundreds and hundreds of basis points in embedded costs they have to cover to lend, putting them at a pricing disadvantage. I think this is only partly true. If it were universal fact, where did the nearly $11 trillion in US consumer lending at an average rate in the high 4%’s come from? Rather, I think banks face cost and regulatory challenges around particular products and customers, and the alternative lenders are exploiting that. For example, I know a certain bank that pays 3X our average acquisition cost just for lead generation for student loans. They have to, because they don’t have a brand that promotes word-of-mouth referral and low acquisition cost, nor is it realistic for them to build one. In these circumstances, alternative lenders can dominate.

Regarding disruption, there is no doubt the card space is big – over $600 billion and Lending Club and Prosper are nailing the consolidation market there and will build huge, profitable businesses. But what about that other $11 trillion in consumer credit? I’ve always felt the real opportunity for disruption was to go after the really big markets – starting with mortgage. To do this, we have to carry over our comparative advantages we’ve built today – brand, acquisition costs, efficiencies and non-bank regulations – and mix in lower costs of financing like securitization (which can effectively blend retail and institutional dollars). We’ve been combining all of these to support our recent move into mortgages (starting in California), and I’d bet by early 2015 SoFi is originating more mortgages than refinanced student loans on a month-over-month basis.

To recap, it was a great conference that was massively attended. Charles’ paper got all of us thinking about what our opportunities really are, and I think that’s a good thing. I’m already looking forward to 2015’s event.

Note: all facts/data in this post are sourced from the NY Fed.