Myth Busting: Are Online Lenders Shadow Banks?

As non-bank lending institutions, alternative lenders have occasionally come under fire for acting as "shadow banks," a term coined to describe the subprime lenders that led to the 2008 financial crisis. However, the term is a misnomer when applied to innovative lenders, according to an industry expert.

Glenn Goldman, CEO of leading small business lender Credibly, explained in an interview last week that online lenders are the "furthest thing" from shadow banking. In fact, Goldman sees "rays of sunshine" around online lenders.

"As each day, week and month goes by, we are looking at new ways of making data, information, trends, ideas, concepts more available, more transparent, and [bringing] the industry to welcome a very open and robust dialogue," Goldman said.

However, there's a lot of work to be done to get to that point, Goldman said, as different loan originators will have different data points and metrics.

"If we were to line up 10 originators within the same asset class and we're all asked to present all of our data, effectively being fully transparent, the fact is no two of us will have all the same data as anyone else," Goldman said.

Goldman sees standardization of what data originators should provide as a top priority to enforcing true transparency in the industry. He sees Orchard Platform's work in creating a lending exchange as "[getting] to the heart of that" priority.

"In order for [Orchard] to be successful, there needs to be a consensus among the participants whether you are a platform, investor, lender, whether you're a rating agency or somebody who is looking to secure top loans," Goldman said.

Standardizing data and documentation among the various lenders would be a "significant leap forward to achieving ultimate transparency," Goldman concluded.