I was interested earlier this week to see that an on-line lender (which shall remain nameless) has announced it’s meaningfully increased the amount of money it is willing to lend to customers, and for longer terms and sometimes at lower rates. I remember thinking to myself, what an odd thing to do.
On-line lenders, as you probably know, are part of a new wave of financial technology/lending firms that claim that they’ve developed credit algorithms and analytics that produce superior results than those used by traditional lenders. Who can say? Maybe they really do. We won’t know for sure, though, until the credit cycle has run its course and revealed which borrowers really were good credit risks and which ones the lenders’ algorithms only thought were good at the time. (This isn’t the first time, by the way, that a tech-driven outsider has jumped into the financial services business and said it could lend smarter than the incumbents. Don’t make me re-live NextCard.) But if the firms’ lending technology really is as good as they say, one would think the smarter strategy would be to use it to oust incumbent lenders to the best borrowers—the supply of which, given the on-line lenders’ collective size, must be limitless—rather than trying to scare up new borrowers by easing credit terms so early in the game.
In financial services, often a lender’s decision to ease credit terms is a sign it’s run out of other options for growth. That’s really not good—especially for on-line lenders, whose outlook for growth supposedly goes on for as far as the eye can see. I admit I’ve been skeptical of on-line lenders (and their tech-like multiples) for awhile. Announcements like this don’t make me any less so.
What do you think? Let me know!