US ONLINE lender businesses are built on an “unsteady foundation”, according to a new Moody’s report. However, inherent weaknesses in the US online lender business model will be limited to a small segment of the market.
The report – titled “Fintech – US Online Lenders: Competitive Advantages in Underserved Niche Market Rest on Unsteady Foundation” – warned that the model for the online lending business’ competitive advantages is positioned on an unsteady foundation of confidence-sensitive funding, low recurring revenue and high marketing budgets.
Although aggregate loan origination volumes have increased from $1bn (£815m) in 2011 to over $20bn in 2015, Moody’s concluded that the overall market share was small enough to cause minimal disruption.
“There is a range of online business lending models, each serving a different niche,” said Moody’s senior vice president Warren Kornfeld. “Online lenders have yet to achieve adequate profitability, and rapid growth exacerbates the volatility of their performance.”
The report also noted that online lenders face the same funding constraints as traditional lenders during times of uncertainty when confidence-sensitive funding is less available.
According to Moody’s own research, some US-based online lenders have spent as much as 55 per cent of their revenue on sales and marketing. While the companies may believe they are investing for the future, the payoff from their high sales and marketing expenses is uncertain, according to the report.