By TheTruthAbout on flickr
Consumers aren't dialing in to try and repair their credit woes lately, so much as they're going online to get new loans and refinancings.
The money is coming in two ways: investment in the startups, and the securitization of loans, according to a Keefe, Bruyette & Woods report.
Startups like SoFi and Commonbond are repackaging consumer loans into asset-backed securities (bonds) and selling them onto investors including hedge funds and banks.
Proceeds from the bond sales are turned into more loans.
Asset-backed securities were also used to bundle mortgages during the run-up to the financial crisis - and blamed for excessive risk taking by mortgage lenders who offloaded the debt to other investors. KBW says most of the loans right now are "A-rated," meaning that they are of high quality - a factor that's drawing in the investors.
Still KBW's analysts caution that - even if lending standards stay high - one risk of relying on the ABS market is that investors can get spooked and stop buying:
"A thriving asset-based securitization market can be robust until demand drops dramatically given concerns about asset quality and corresponding risk. While we are not trying to draw the comparison to the last financial crisis ... we believe these thriving upstarts could find a significant change in their business models in the future if institutional investors were to pull back."
The cash is flowing into lending startups another way. Online lenders are raising hundreds of millions of dollars at enormous valuations. Last week, SoFi took on a whopping $1 billion round led by SoftBank - the single biggest fintech startup investment ever - and Avant, a lender that aims to provide credit to consumers with lower scores, also took on funding that values the company at $2 billion.