The “Skin-in-the-game Dilemma” in Marketplace Lending

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[Editor’s note: This is a guest post  from Argon Credit. Argon Credit is a silver sponsor and will be in attendance at LendIt USA 2015 on April 13-15. In this post, they talk about the skin-in-the-game dilemma in marketplace lending.]

It is no secret that consumers are looking for alternatives to bureaucratic banks, endless credit cards and infamous payday lenders and that the lending industry is projected to continue growing rapidly, based on consumer demand. In 2013, for example, $2.4 billion in personal lending loans were issued to borrowers. That’s up from $871 million in 2012, according to The Economist magazine.  Morgan Stanley has projected the Total Addressable Market to be $300 Billion in consumer credit and $280 Billion in small commercial loans, there is certainly plenty of opportunity for both companies and investors. However, when speaking with investors, we have noticed a troubling trend emerging in the industry regarding the alignment of interests between marketplace lenders and the investors that they serve – we refer to this issue as the “Skin-in-the-game Dilemma.”  Marketplace lenders’ incentive is to originate as many loans as they possibly can as this is where and how marketplace lending companies generate revenues.  However, we view this as a conflict of interest for investors as the quality of borrowers (and thus returns) is sacrificed in exchange for generating larger volumes of loans.

How Argon resolves the “Skin-in-the-game Dilemma”:

Argon has created an intensely investor-focused model that aligns our interests with our investors by retaining 30% of every loan we generate on our balance sheet using our own equity – our “Skin in the Game.”

We have several different models to apply this investor-alignment strategy:

  • Balance Sheet – Near-Prime Portfolio, equity retained
  • Hybrid Flow –  Investor specific yield hurdles, Argon equity-retained risk model

Argon analyzes more data points (in milliseconds) for a $3000 personal loan than traditional banks do for a $1,000,000 mortgage loan. Argon’s proprietary underwriting process enables us to evaluate consumers on a large number of specific data points that go beyond traditional credit score. Argon is unwilling to compromise by outsourcing our risk analytics to one of the major credit bureaus – a model employed by most of our competition.   Using Artificial Intelligence, Argon is collecting, analyzing, and using data to maximize returns.

With the personal loan market on course for explosive growth and the current misalignment of interests between marketplace lenders and investors, we are certain that Argon can provide stable returns and investment-return security that financiers have been seeking.

Team Argon looks forward to speaking with you at the LendIt Conference – Booth 610.