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2016 has been quite the year for marketplace lending — beginning with Lending Club’s troubles in May, whose effects have rippled throughout the rest of the year, and continuing with external political factors affecting the global market (read: Brexit in June, the U.S. election in November). It has certainly been a difficult year for all players in the industry, as we’ve seen in the recent executive management changes at Prosper; the sum of events in 2016 no doubt causing everyone to wonder what the future of MPL looks like. This month, we thought we’d take a deeper look at the market response in Q3 and projections closing out Q4 to address these concerns.

Investment trends in Q3 + Q4 of 2016 reflect sentiments of slow, cautious growth.

According to a recent KPMG/CB Insight report,  fintech VC investors seem to be proceeding with caution. “Total investments to key areas like marketplace lending and blockchain technology have both seen declines heading into the tail-end of 2016,” states Anand Sanwal, CEO of CB Insight. Though the report concludes that “the year-to-date view shows a positive trend” despite this quarter’s losses.

While an overall decline in MPL returns were reported by investors in Q3 of 2016, there is optimism in the long term benefits of investment. “Both Lending Club and Prosper have increased interest rates several times this year as well as tightened their underwriting and that will help going forward,” says Peter Renton of Lend Academy, who publishes a transparent report on his personal investments every quarter. “But because these are three and five year loans I am investing in I won’t be seeing the benefit in my returns here for quite some time,” adds Renton.

Though MPL securitization remains hopeful in the ABS market. According to PeerIQ’s recent analysis on Lending Times, “Total issuance topped $2.4 billion this quarter—a record—and is up 41.1% from Q2, with cumulative issuance now totaling $12.7 billion.” Steady growth, relative to last quarter, is cited in Q3 as well: “Nine deals priced, totaling $2.4 billion, representing steady growth of 41.1% from the previous quarter.”

Meanwhile, Lending Club appears to be rising above their troubles from earlier this year.

At the beginning of November, Lending Club released their Q3 ’16 earnings, which showed a slight increase in loan origination – from $1.95 in Q2 to $1.97 billion in Q3 – and introduced a new auto refinance product. These combined factors, along with with the company’s secured $1.3 billion in funding from Credigy, a subsidiary of the National Bank of Canada, may have contributed to the recent positive response from investors.

The industry as a whole doesn’t seem to be suffering either. Marketplace lenders continue to expand credit in the small business community, as well as niche markets, such as mortgage-focused online lending, where companies like LendingHome are enjoying high levels of success. Further, there is speculation that the outcome of the recent U.S. election may have unexpected benefits for alternative lenders.

On the horizon: changes to existing platforms and loan volume growth

So, what are the MPL investment trends we anticipate in 2017?

Platforms finding ways to sustain their businesses. The recent performance issues of some online lenders, such as CircleBack and Avant, whose problems stem from 2015, have included cutbacks in lending targets, workforce, and new loans — and we don’t view the examples of CircleBack and Avant as isolated incidents.

Moving forward, we anticipate other platforms having difficulty raising additional equity capital. Further, we expect that there will be consolidation, or downright failure of some platforms – leaving the remaining platforms to find a way to survive by raising strategic capital.

This news shouldn’t be taken as purely negative though; rather, it will challenge MPL platforms to be more resourceful, innovative in their strategies. Again, not terrible things.

Modest, but not dramatic, volume increase. Loan volume may contract for Prosper, who reached its lowest quarterly origination in two years this quarter, yet the company maintains ongoing discussions with the responsible lending consortium, Online Lending Network. Meanwhile, Lending Club’s loan volume shows surprising promise, exhibiting stability and an increase from last quarter. At MonJa, we also have anecdotal evidence of multiple large “buy-and-hold” investors coming into this space, especially internationally.

Brian Hughes of KPMG also echoes this sentiment of growth in the fintech sector: “In Q3’16, corporate venture capital participation in global deals to VC-backed fintech companies reached 30% for the second consecutive quarter,” he states. “This interest will continue to grow as corporates are looking to take advantage of the opportunities fintech provides.”

Further, with products like Goldman’s Marcus, there is a high potential for MPL collaboration with banks in 2017; either through Bank-Fintech-Bank (BFB), Fintech-Fintech-Bank (FFB), or Bank-Fintech-Fintech (BFF) partnerships.

Are there other trends do you expect to see in 2017? We’d love to hear your thoughts in the comments, below.

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