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We are about a month removed from the LendIt USA 2016 conference at the Marriott Marquis in San Francisco, which had some sessions predicting the upcoming golden age of marketplace lending, while others declared “the honeymoon is over.”

The truth, as it tends to be, may be somewhere in the middle. Regardless of your personal outlook on the industry, there are some undeniable truths regarding the lending industry as it stands today.

Millennials are Using You

There was an entire session at LendIt dedicated to millennials, titled “Millennials’ Attitude Towards Money and Technology,” proving that there is a lot of pressure on these financial companies to attract millennials to their services. The session defined millennials as “anti-stereotype, pro-authenticity, pro-transparency, and consumer-first,” all traits that well established financial corporations tend to lack.

79% of people see their relationships with their banks as purely transactional, meaning that they have no inherent loyalty toward their banks, the banks are simply a means to an end. Banks haven’t been satisfying their customers, so their customers don’t feel any obligation to start a loan with the banks they are already using.

Low customer satisfaction has created an opening for marketplace lenders to penetrate the market. Following an Uber-esque model, marketplace lenders emphasize being mobile accessible, quick, easy to use, and transparent. Many loans are approved within minutes rather than days, weeks, or months, all without ever having to physically meet someone for approval. In some cases, the loan itself can be provided immediately after approval.

During his keynote, Ron Suber, president of Prosper, asked the audience, “Where is Blockbuster?” (referring to the chain of rental stores where families would go to argue about which movie to watch after dinner) and, “What happened to music stores?” (their original purpose lost to time).

The answer to his rhetorical questions are that convenience, value, and user experience eventually win out, and this is especially true with millennials. Banks, which are notoriously slow to adapt and react to new technologies, are the Blockbuster Video to Prosper’s Netflix. Some banks, in fact, are forming partnerships with marketplace lenders in order to better serve this market, providing marketplace lenders with the capital necessary to provide these loans, while the marketplace lenders provide the technology.

Growing Pains

While it makes sense that marketplace lending is an attractive alternative to traditional loans, especially to the younger demographic, there are inherent risks in being on the bleeding edge of marketplace lending. For one, investors don’t seem to be that interested. This has lowered growth expectations almost universally across the marketplace lending industry, making the bank partnerships mentioned above appear all the more attractive.

Although investor interest is waning, the popularity of online lending seems to be steadily trending upward. Only time will tell if the industry is actually sustainable, and whether it can weather an economic crisis similar to 2008.

The industry is also facing more regulatory scrutiny as it grows, and must create mechanisms to self-police and create a standard of quality in order to gain more trust and acceptance. The difficulty will be in abiding by these regulations while still remaining innovative, nimble, and maintaining a great user experience, which are the very reasons marketing lending is so attractive to consumers in the first place.

Efficient risk assessment will be key in approving loans for the right people in a reasonable amount of time, and the amount of time deemed “reasonable” is shrinking with every new iPhone release. Complicating things further are that many of the people that gravitate toward marketplace lending are “thin file or no file,” which isno surprise as millennials are largely considered “unbanked”. In addition, globalization and the complexities of financing terrorism pose an extra burden in the market, as demonstrated by the relation between an online lender and the San Bernardino attack.

Addressing the challenges of onboarding “thin file or no file” and meeting the demands of user expectations require proprietary risk models to be developed for these groups, taking into account non-traditional data sources such as customer behavior when visiting a marketplace lender’s website, internet history, phone carrier data, and social media data.

To address some of these concerns, there has been movement towards self-regulation and cooperation with the creation of the Marketplace Lending Association, spearheaded by three major marketplace lenders: Funding Circle, LendingClub, and Prosper. They intend to set industry standards to foster the responsible growth of the online lending industry, and encourage sensible public policy.

Unsurprisingly, the leaders in the marketplace lending industry are optimistic they can overcome these challenges.

Predicting the Future

The top five players (LendingClub, SoFi, Prosper, Avant, and Marlette) in the marketing lending space grew in volume from $8.2 billion to $20.5 billion from 2014 to 2015. The giant looming over the horizon is the emergence of the Chinese online lending market. At least 500 million people are in the target demographic for marketplace lenders; people who have a hard time accessing credit, are very comfortable using technology (mobile phones specifically), and are traditionally underserved by banks.

There is no doubt that the marketplace lending model is attractive to an increasingly technology-centric population. Unfortunately, it is also very attractive to fraudsters, money launderers and terrorists. An impressive $569M in losses is associated to defaults and fraud.

And Yet…

All types of services are heading in an online, mobile, and convenient direction. Everything is getting more streamlined, people want to get what they want the instant they want it. This mindset is permeating through every aspect of our lives. The question then, is if marketplace lending can survive the inevitable barrage of regulations laid down on them, while still maintaining the qualities that make marketplace lending attractive in the first place, and if the industry can survive another major economic recession. Should the marketplace lending industry be able to make it through these challenges, there is no denying the potential there.