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Q4'16 Loan Originations Fall YOY For Digital Lenders, Capping Off A Rocky Year

The U.S. digital lending market has started to mature, with more focus on achieving sustainable growth and profitability.

Company-specific issues at more established platforms along with publicly traded lenders' profitability struggles raised questions about the viability of the industry in 2016. Many of the sector's challenges were concentrated in the first half of 2016, and loan originations rebounded sequentially in the fourth quarter, although below fourth-quarter 2015 levels. The second half of 2016 saw some lenders tighten underwriting standards. Meanwhile, capital was scarce for marketplace lenders as investors slowly came back into the market during the third and fourth quarters.

Despite a rough start to the year, S&P Global Market Intelligence estimates that 13 major U.S. digital lenders grew full-year 2016 loan originations 15.0% to $28.39 billion, with some platforms seeing triple-digit annual growth. As described in our 2016 U.S. Digital Lending Landscape, S&P Global Market Intelligence divides these platforms into three segments by lending focus: personal, student and small-and-medium enterprise (SME).

Double-digit annual growth in the SME and student-focused segments during 2016 helped offset a 9.2% decline in originations from the personal-focused segment. Student-focused and SME lenders grew full-year 2016 originations 62.3% and 43.0%, respectively.

During the fourth quarter of 2016, originations from all three segments fell 14.5% year-over-year to $7.65 billion, with declines in both the personal- and student-focused categories. SME-focused lenders increased fourth-quarter originations 24.8% year-over-year.

Loan originations down YOY in Q4 16 for key US digital lenders

Cumulative originations have grown to an estimated $68.75 billion for the 13 lenders we cover since their respective inceptions. Growth in cumulative originations has stemmed from increasing origination volumes at incumbent digital lenders and the entry of new platforms into the market.

Cumulative loan originations by key US digital lenders

A tough fourth quarter for personal lending

Personal-focused lenders suffered the most from industry headwinds, with fourth-quarter 2016 originations falling 31.0% year-over-year. Full-year 2016 originations decreased 9.2% to $14.02 billion. LendingPoint and Upstart Network were standouts in 2016; each grew their annual originations by more than 17% year over year, albeit off a much smaller base than their competitors.

Prosper Marketplace Inc. and LendingClub Corp., the two oldest and largest companies in the segment, faced unique issues in 2016. Prosper saw the end of a relationship wherein Citigroup Inc. had been purchasing and securitizing its loans. While annual originations fell 39.0%, there was a pickup in demand in the fourth quarter, with loan volumes growing 60.4% sequentially to about $500 million.

The Lending Club platform saw a slowdown in demand from investors following a series of events that included the resignation of founder and CEO Renaud Laplanche in May 2016. Lending Club subsequently tightened its lending standards and targeted a smaller pool of borrowers, leading to lower originations in the fourth quarter than its near-peak a year earlier.

Even as fourth-quarter 2016 originations for Lending Club fell 23.0% year-over-year, annual originations grew 3.6% compared to 2015. The platform originated $1.99 billion in loans during the most recent quarter. Management noted on the earnings call that the platform achieved this without providing incentives to investors as it had done in earlier quarters.

Quarterly personal-focused lender originations

Double-digit fourth-quarter origination growth for SME-focused lenders

SME-focused lenders have seen steady growth in quarterly originations. Fourth-quarter 2016 originations for the segment increased 24.8% year-over-year to $1.31 billion. Square Capital, one of the newer lenders in the space, saw fourth-quarter originations grow 68.7% year-over-year and annual originations jump 122.6%. OnDeck, the most mature platform in the segment, saw fourth-quarter originations grow 13.5% year-over-year as it continues to move from marketplace sales to a balance-sheet funding approach.

Quarterly SME Focused lender originations

Originations for student-focused lenders down slightly

Quarterly originations for student-focused lenders declined 2.8% to $3.07 billion in the fourth quarter of 2016. The last quarter of the year tends to be the highest point for originations as grace periods for many loan programs end, increasing the appeal of a refinance product.

Social Finance Inc. had more origination volume in 2016 than any other digital lender we tracked, with $2.55 billion in fourth-quarter originations bringing the yearly total to $8.05 billion. Despite growth of 54.8% for full year 2016, SoFi saw originations fall year-over-year in the fourth quarter for the first time since the platform launched. SoFi has been changing its product mix over time, adding personal loans and, more recently, mortgages to its core student loan refinance business.

Quarterly student focused lender originations

The decline in originations at the two pure marketplace lending platforms, Prosper and Lending Club, during 2016 illustrates how concerns around structural or company-specific events can quickly constrain supply of capital to marketplace lenders, slowing the ability to generate new loans. LendingClub Corp.’s management team has noted that they now have sufficient capital supply to fund loans, and Prosper recently inked a deal that could provide $5 billion in capital to the platform over the next two years.

With capital available to back loans and lessons learned from 2016, we should see continued loan growth in 2017 along with a push by digital lenders to reach sustainable profitability. Execution will be key, especially for the most visible platforms. Any sign of deteriorating quality in outstanding loans or a platform failure could send investors running.

Methodology

Origination volumes are based on company-provided data from LendingClub (all periods), OnDeck (all periods), SoFi (Q4'11, Q3'12-Q4'16), Prosper (all periods), Kabbage (Q1'14 and Q2'16), Upstart (all periods), Credibly (Q3'16), Earnest (Q3'16), Square Capital (Q2'15-Q4'16), CommonBond (Q2'15), and LendingPoint (Q4'15). This includes information from company contacts, press releases, SEC filings and websites. Upstart originations have been updated for all historical periods as of March 27, 2017, to reflect company-provided numbers. BestEgg originations were updated for Q3'16 based on a Kroll Bond Rating Agency pre-sale report dated March 23, 2017.

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BestEgg originations for Q1’14 through Q2’16 are from a Kroll Bond Rating Agency pre-sale report dated Aug. 2, 2016. Avant originations for Q1'13 through Q1'16 are from a Kroll Bond Rating Agency new issue report dated April 18, 2016. CommonBond originations for Q1'16 are from a DBRS new issue report dated April 8, 2016.

The analysis also reflects company-provided data for periods prior to Q3'11, including LendingClub (Q3'07-Q2'11), OnDeck (Q3'08, Q1'09-Q3'09, Q1'10-Q2'11) and Prosper (Q4'08-Q2'11).

All other periods are based on proprietary S&P Global Market Intelligence estimates. For more details on estimates, see our 2016 U.S. Digital Lending Landscape.

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