Online lending set to see a 'culling of the herd'

Start-ups are looking to cash in as financing capital has become tough to come by.

Bad news isn't getting any better for dozens of marketplace lending start-ups.

There's going to be a "culling of the herd," which will help weed out winners and losers, said Pat Grady of Sequoia Capital. Grady is one of the venture firm's partners and sits on the board of online lender Prosper.

Industry executives' comments, which came this week at the CB Insights Future of Fintech conference in New York, supported Grady's statements. Ron Suber, president of Prosper, said he was aware of "a lot" of his competitors shopping themselves.

Kathryn Petralia, co-founder and head of operations at online lender Kabbage, agreed that consolidation is looming for marketplace lenders.

But those looking for mergers and acquisitions might not want to expect a premium.

"Upside has been grossly overestimated" in the business, Grady said.

So far, no big deals have unfolded. But the industry has come under pressure and scrutiny in recent months as fintech companies' public market valuations have been hammered.

The ouster of LendingClub CEO Renaud Laplanche in May and subsequent investigations into the company spurred a steep drop in the stock's price, so much so that, according to one report, private investors have been trying to team with Laplanche to buy the company out at a discount.

The company did not respond to requests for comment.

Part of the difficulty both small business lenders and consumer lenders have had to confront in 2016 is a relative dearth of access to money to lend to potential borrowers, and the industry's headaches appear to be growing by the day.

There's an increasing wave of regulations from Washington coming to the financial technology industry, and it's happening at a time when certain online lenders' business practices have come under scrutiny from investors as well, said Scott Kessler, deputy global director of equity research with S&P Global Intelligence.

"This is definitely a period of retrenchment and consolidation," Kessler said. "There has been a lot of talk about access to capital."