Marketplace lending is booming — but where are the borrowers?

The LendItUSA event, taking place in New York this week, has trumpeted the victories of marketplace lending, and they are considerable: $9 billion in consumer loans written by marketplace lenders in the US alone in 2014, not to mention $5 billion in small business loans; Lending Club partnering with Citi;  LendKey securing $1 billion in financing …

The money keeps pouring in to marketplace lending — at least from the investor side. But with consumers, marketplace lenders face a problem familiar to banks — finding borrowers.

Marketplace lenders, like banks before them, are exploring every available channel and generally spending more to find borrowers than ever before, even as the industry celebrates ever-rising numbers. Perhaps the most obvious place to find borrowers for markeplace loans is online, through paid search placement and agencies that will get your name in front of potential customers. Prosper and Lending Club employ teams of people to manage this, but smaller lenders cannot always afford to devote an employee solely to search, which is “at least a full-time job,” as members of a panel discussion on borrower acquisition agreed. And that FTE would not come cheap.

Bankers, sound familiar?

“SEO is expensive,” said Cheryl Law, chief marketing officer at Prosper Marketplace. “You need agency partners.”

These partners include third-party sites from which borrowers may be sent to Prosper or other online lenders. Of course, partners such as this mean a small part of the user acquisition process is outside the lender’s control. It is imperative to perform frequent reviews of these partners in order to make sure the language is correct and compliant, said Scott Sanborn, chief operating officer at Lending Club. Sanborn and his team check these sites “quite often” to keep an eye on partners.

It should be noted that while marketplace lenders are not yet subject to bank-level regulation, the industry is prepared for it and is doing its best to comply in advance. In the U.K., government regulators encourage banks to send their turn-downs to alternative lenders, but that is unlikely to happen in the U.S., according to Lendio CEO Brock Blake.

Cost per acquisition is also on the rise across the industry, according to Ryan Gilbert, CEO of Better Finance. Lenders were wary of discussing numbers when asked by audience members, but Gilbert gave the following example of rising costs to alternative lenders: “Just look at the cost to attend this conference,” he said, which drew nearly 2,400 attendees. (Registration: $1,295.)

Marketplace lenders are also looking to traditional forms of advertising to get in front of borrowers. For regions where drivers spend a great deal of time in the car, such as Los Angeles and Atlanta, as well as Dubai and Moscow, radio advertisements perform well. Lead generator Credit Karma has led the way in television advertising, which CEO Kenneth Lin said was done judiciously to keep costs low, and has showed strong results.

Even the venerable advertising vehicle direct mail is being utilized by alternative lenders of all sizes, and while it requires patience — having to wait 90 days after mailing doesn’t always sit well with lenders who cut their teeth on digital — it is indispensable. Direct mail? “Gotta do it,” said Gilbert, and other panelists agreed.

At least 80% of borrowers using Lending Club and Prosper, the two largest US marketplace lenders, are prime customers consolidating credit card debt, but beyond that “low-hanging fruit,” as LendingRobot’s Emmanuel Marot described the best customer, seems scarce. And so a new industry, awash in money and rich in technological wizardry, finds itself still needing to solve an old problem familiar to the industry it is said to be disrupting — identifying and closing borrowers.