The economy has recovered since the global financial crises. However, there is an unspoken side to this story; the economy that rose from the ashes is different than the one we lost. Today, people are discovering that they need to work three times as hard for one-third the gain. Wages have stagnated, and risk-averse companies have been hesitant to make capital outlays for growth. The painful memory of the downturn is still fresh and therefore strains the trust in our financial system.
Today, young investors are understandably skeptical of financial advisors and major equity firms. Millennials came of age among the ruins of Enron and toxic CDOs. They are choosing instead to leverage their considerable resources to inform their investment decisions. In doing so, they’re learning that the common strategy of a portfolio comprised of 60% stocks and 40% bonds is inadequate. In today’s world, a reasonable return amid manageable risk requires more options than stocks and bonds.
The rise of FinTech has empowered Millennials to seek these new tools. Among the most useful of these solutions is marketplace lending. In this article, we’ll look at how accessibility, transparency, and growth are the three reasons millennials are turning to this innovation.
Accessibility: Born From Technology
The intuitive design of marketplace lending platforms appeals to millennial’s sense of expediency. “What’s making me successful (is) the ability to deliver millennial-relevant services,” remarked the chief information officer at Accenture. Traditional investment instruments like stocks and bonds have adapted to the internet over the decades. However, marketplace lending developed entirely from digital roots. This foundation means investing in online loans is faster and more intuitive than accessing information on publicly traded companies.
Accessibility isn’t just a technological aspect. Those who are new to investing want products they understand. Marketplace lending is an accessible concept because the idea is simple: individuals borrow and lend among themselves without the intermediary of a bank. Conversely, stocks and bonds are inherently complex. Investors must understand not only what the issuing company does but other measurements like beta, P/E ratio, volatility, duration and market capitalization.
Marketplace lending is engaging because it adheres to the investing rule that you should “never invest in a business you cannot understand,” as Warren Buffett put it. Too often the underpinnings of a publicly traded company are obscured. However, Millennials can immediately connect with the idea that when borrowing and lending are simplified, both sides win.
Transparency: A Way To Build Trust
Lending platforms achieve this simplicity by making their framework transparent. An analysis from Deloitte determined that “millennials tend to not fully trust their adviser.” Additionally, the same report recommends that “To overcome this negative attitude, wealth management firms initially need to focus on the pricing transparency.” It is easy to understand why trust has eroded. Millennials have witnessed one of the most disastrous economic upheavals in history. Moreover, financial firms were the catalyst for the vanishing billions of wealth.
It is easier for Millennials to develop trust with marketplace lenders because performance isn’t buried behind balance sheets or income statements. Rather, the critical numbers are plainly visible with a simple review of the borrower’s credit score and repayment history. Many marketplace lenders offer an array of data to investors. For investors seeking more in-depth insights firms like dv01 have emerged to provide “technology designed for lending market transparency.” Young investors understand that the Great Recession was the result of the obscurity surrounding CDOs. As a result, they seek the clarity available in many P2P platforms.
Growth: Prospering With Returns
The recent stock market run up belies the long-term prognosis shared among economists. “Global trade is in a grim state,” remarks a journalist writing for The Economist. The basis for this assertion is that “On September 27th the World Trade Organisation slashed its forecast for growth in trade of goods from 2.8% in 2016 to just 1.7%, implicitly predicting that for the first time in 15 years, trade would grow more slowly than GDP.” These downshifting returns have led many market prognosticators to deliver an equally grim forecast of stock market earnings over the long-run.
Vanguard CEO Bill McNabb offered this clear assessment of the market: “Stocks are pretty highly valued, and bonds you can project clearly over a decade. … So when you do the math, you end up 2 percent lower on an absolute basis.” These muted stock and bond returns coupled with expectations of higher inflation put long-term investors at risk. Resultantly, Millennials are broadening their asset classes to recapture the annual returns enjoyed by investors in previous eras.
The world is changing, and major events like the Great Recession only work to accelerate this change. Millennials are navigating their future with investing options that move as fast as they do through accessibility, transparency and a reach for higher returns. Our new economy requires new solutions and marketplace lending is at the fore of this phenomenon.