P2P & Marketplace Lending

LC race

As the online lending industry prepares for its big event, the LendIt USA conference in NYC on April 13-15, I thought it a good time to discuss peer-to-peer (P2P) lending.

To me, this aspect of FinTech is the perhaps the most interesting, innovative and straightforward versus other areas, such as payments (with all its participants – as noted in my last post), digital banking, cryptocurrency, and robo advisors.

P2P lending is disruptive and proven; it adds value in a clear way by providing better rates for borrowers, and higher rates for savers seeking to invest. Companies are tech-led, often with a distinctive ‘non-bank’ culture, people and work environment.

But at the same time, there are a few misconceptions I’d like to address  – without detracting from the alternative lending industry’s innovation and success.

lendacademy Most readers are familiar with P2P lending, given the press coverage lately. But for those who don’t know a lot about P2P, I’d suggest starting off by reading Peter Renton’s superb blog:  LendAcademy.

Inspired by Peter Thiel’s question (from his book, Zero to One), “What important truth do very few people agree with you on?” here’s of few of my thoughts on P2P:

First, although this misunderstanding is more pervasive in the public than readers of this blog, ‘P2P lending’ is really not true P2P – and hasn’t been for some time. The fuel behind the industry’s growth has come largely from big institutional investors.

prosper

(The name marketplace captures the shift. For instance, at providers like Prosper, around 2/3rd of investors in its loans are institutions and 1/3rd are retail investors).

Beyond this, some in the press say that banks are “threatened” by marketplace lenders. A classic example of this was in the 2014 post “Why Wells Fargo Is Terrified of Peer to Peer Lendingpublished on Lending Memo, an affiliate link site (i.e. paid for clicks to alternative lenders). The truth is far more nuanced.

Just as institutions play an important role in the P2P model, big banks (especially the larger ones) benefit in myriad ways, e.g. wholesale banking groups are getting revenue from the related growth in ACH payments. Banks also profit by lending to the institutional investors that participate in the new platforms.

LC logoAnd CEO Renaud Laplanche has stated, Lending Club is expanding the market, not trying to take out the banks. Someone once said, having met Laplanche at a meeting at a bank: “He would fit in here easily.” (He’s famously low-key).

Having worked at Morgan Stanley, I know its people and franchise played a part (along with other banks, like Wells Fargo) in building Lending Club, from placing Mary Meeker and John Mack on the company’s Board, to helping plan as well as manage its IPO, to capturing the post-IPO wealth management opportunities. This is true at other big banks across other platforms.

kabbage

And not just the big banks. Forward thinking banks, like Celtic Bank, behind Kabbage, also benefit from the growth in new lending marketplaces.

Another line often heard that I would disagree with is the marketing meme: “You know how bad banks are? Use X – we cut out the middleman.”

But many of the institutions are hedge funds or private equity firms. In fact, some funds just put up 15%, borrowing the rest from Citi, to leverage up their returns on marketplace sites from 8% to 12%. (This is fine by me, but let’s spare the David vs. Goliath myth about banks vs. startups since the story is more symbiotic).

And is the experience much better? Perhaps on pricing and speed. But some of customer experience (from Notes and using tools like Nickel Steamroller to having to master XIRR to see how you’re doing) isn’t a lot better, if you ask me.

What important truth do very few people agree with you on? – Peter Thiel

“Banks can’t innovate and are too slow” is another piece of conventional wisdom that I partially disagree with, though I agree to a point. To me, Schwab’s roll-out of the Intelligent Portfolio’s is a proof that incumbents can be fast followers.

But I agree that the nimble size of startups, focus on customer needs, role of VC’s and lack of legacy technology can lead to more innovation. And the startups can lead to others having to up their game, e.g. Prosper’s superior credit model will lead others to improve their model, for example.

canaan partnersI could still envision banks, either as a consortrium or supporting a startup backed by the VC’s active today in FinTech, e.g. Canaan Partners, CoreVC, Foundation Capital, A16Z, General Catalyst Partners and Google Ventures – starting a broker-dealer to create a cross-company secondary market in notes from Prosper, LendingClub and others.

I’m sure there will be plenty of other interesting conversations about SoFi’s valuation, and whether Lending Club’s post IPO performance suggests anything other than too high expectations (plus effect of the looming June lock up) at LendIt.

It’s a pivotal time for marketplace lending, as recent articles in the FT and on some industry blogs have noted. It’s clearly in the early innings, but I expect lots more great things to come from marketplace lending.

But to close, having sailed for LBS vs INSEAD in a race around the Isle of Wight, I’d like to just give a shout out for Lending Club’s record time across the English Channel last week (see photo at top).

Impressive achievement and useful reminder there’s a world of adventure out there – beyond the stock market and marketplace lending!

 

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