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'Past is prologue,' says former OCC chief on maturing fintech

A former chief of staff at the Office of the Comptroller of the Currency this week hyped the growth of fintech and marketplace lending, but indicated that the industry now faces a different set of challenges as it matures.

Paul Nash, now managing director of Nash Strategies, said, "What's past is prologue", a line from Shakespeare's The Tempest, to indicate that the last two years of growth for the young fintech and marketplace lending industry had only set the stage for the next phase of its development.

“It is evident that the industry has not only grown since the early days, but has matured in important ways,” he told a crowded room of investors and issuers at the IMN Investors' Conference on Marketplace Lending in New York last Friday.

But he described the real indicator of whether the industry could survive a change from what is a benign credit environment to an economic downturn as: “With the consensus expecting the economy to expand in 2018, we have some cracks in performance, with unsecured consumer charge-offs from marketplace lenders having increased since the fourth quarter of 2015,” Nash said. “It remains to be seen how companies originating loans using new models and technologies will perform under stress.”

According to data provided by Nash, marketplace lenders have originated about $40bn of consumer and small business loans in the US over the last decade. Nash projected that with online lending doubling since 2010, the industry could have anywhere from $300bn to $1tr of assets by 2025.

“A maturing industry brings different sorts of issues, compared to a brand new one. Topics such as meeting community needs, financial inclusion, collaboration and compliance – these are all very important concepts to regulators as they seek to learn more about the industry,” said Nash.

He also highlighted the shift in funding models for marketplace lenders as their businesses mature. More lenders are aiming for longer term, stable funding.

“As the industry has grown, more companies have sold whole loans to institutional investors, including banks and private equity companies. Companies have found a balance in selling to retail investors, [doing] securitizations and even exploring the potential for deposits,” he said.

Nash further indicated that as part of preparations for the future, both the industry and incumbents should not forget the lessons of history, including the constant need to adapt and innovate.

“History shows us that progress comes in waves. Based on the volume of change occurring today, there’s a palpable energy growing daily behind financial innovation. It’s clear that we’re in the midst of a large wave of disruptive change,” Nash said.

He added that the secret of the agency’s and the national banking system’s longevity was the ability to “adapt and innovate” to meet the changing needs of consumers and businesses.

“That ability to adapt is as critical today as it was when the financial banking system originated over 150 years ago,” he said.