Saturday, December 19, 2015

The Dangers of Fintech

“Originate to distribute” is back with a vengeance — this time by way of fintech platforms which seemingly think they’ve discovered some hitherto unknown alchemical process which allows them to have their cake and eat it.

For the most part, this involves charging risk-free rents/commissions in exchange for bringing lenders and borrowers together on platforms in such a way that lots of lovely new loan business can be originated.

Indeed, whether it’s a P2P lender or a bank institution like SoFi (which temporarily finances the loan until it can shift it off-balance sheet to the capital markets) or even a bank which has decided to acquire a P2P platform directly, the nature of the game remains the same: risk-free arbitrage.

Yet it was only eight years ago we learned institutions which don’t have skin in the game when originating loans, don’t have much of an incentive to guarantee loan quality either. Until, of course, it’s too late because their reputations — (due to the origination factor) — have become tied to the long-term success of these loans whether they reside on their balance sheets or not.

To wit, we wonder if the BIS will be looking at P2P lenders and new-found millennial banking models as it moves to identify new pockets of so-called step-in risk in its consultations over the next few months?

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