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What's Next for the Peer-to-Peer Lending Industry?

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The consumer credit market is a $2.7 trillion industry. In a few short years, peer-to-peer lending is gobbling up a greater share of the pie. In the last of a three-part series on peer-to-peer lending, the experts look at the future of peer-to-peer lending.

One only has to read the headlines to know that the industry continues to morph. P2P powerhouse, Lending Club, is partnering with seven small community banks. The banks buy loans through the Lending Club platform. Lending Club uses technology to make the customer acquisition, underwriting and servicing process more efficient and to operate at lower costs than traditional branch-based banks.

"The combination of our low operating cost and banks' low cost of funds help create a significantly lower cost structure for providing personal loans, which enables consumers to either pay off or avoid expensive credit cards," Lending Club CEO Renaud Laplanche said in a statement when the first partnerships were announced in June.

Titan Bank is one of the banks that had teamed with Lending Club. Titan offers personal loans to their customers through a private application. Lending Club provides origination and underwriting services and shares fee revenue with Titan.

The bottom line – Lending Club can help small banks deploy liquidity and diversify their portfolio at a reasonable price.

Titan Bank Director Jonathan Morris summed it up simply last summer, "This is the future of bank lending."

Moving forward

The industry is pushing past partnerships. Funding Circle, Dealstruck and Quarterspot already offer small business loans. Just this month Lending Club launched a new business loan platform that is targeted to small business owners who have a tough time getting access to the capital they need to start or grow their business. Business loans will range from $15,000 to $100,000 initially, increasing to $300,000 in the future, according to Lending Club. The loans are fixed rate and start at 5.9%, with terms of one to five years, with no prepayment penalties. You apply online.

The big question is what's next? "It's inevitable that P2P lending will extend into commercial loans, auto loans and mortgages," says Jonathan Smith, CEO of the ChiefOptimizer, a business consulting company.

There are already some platforms out there offering real estate loans, although admittedly not 30-year mortgages, says Peter Renton, CEO and founder of Lend Academy. "I have also heard of entrepreneurs looking to start P2P lending platforms for auto loans. Student loans are already happening with two platforms, SoFi and CommonBond," says Renton.

Banking as we know it today is inherently inefficient with business models and cost structures that are mired in the 20th century

Stu Lustman, blogger at P2P Lending Advice, weighs in. "Peer-to-peer lending exists because banks are not making these kinds of loans. Even home equity lines of credit are way down, despite the fact that they are secured by the real estate in someone's home. The evolution of peer lending will continue down this road of providing loans and access to capital in areas that current banks and other institutions are not providing for their base of borrowers. The expansion will continue into commercial loans and maybe auto loans. Mortgages will be tougher as rates are so low, lower than what investors in a peer lending platform will require."

Auto loans are indeed happening. Earlier this month Braeger Auto Finance Group announced its own version of crowdfunding, opening up the investment space of auto financing to individual investors. According to the Braeger Auto Finance Group, it will focus on non-prime auto financing, offering investors high yields on fixed term investments and quarterly returns. Braeger's investment portal is at VroomBank.com. Investors can set up an account, select a fixed investment – a three, four or five year note, yielding 7%, 8% or 9%, respectively. According to Braeger, investor monies will flow through an authorized Financial Industry Regulatory Authority (FINRA) broker/dealer.

What does all this mean for banks?

"For some, it's an opportunity to collaborate with platforms that have structural and cost advantages when it comes to originating, underwriting and servicing smaller-ticket loans. For others, peer-to-peer lending seems like a mortal threat – a disruptive attempt to steal away their best customers by creating a better experience online," says Sam Hodges, co-founder and managing director of Funding Circle, an online loan marketplace for small businesses.

"We think that in coming years more and more banks will be partnering with alternative lenders, which will be a win for many borrowers, as they can get the best of both worlds, an alternative lending borrower experience, but coming form their local bank branch," says Hodges.

Mike Cagney, CEO of SoFi says they have had over $100MM in bank participation in SoFi loans and that number is growing monthly. "Small and intermediate banks are finding it more cost effective and efficient to outsource their loan origination and keep their core focus on deposits," says Cagney.

Lending is becoming democratized. "It is a new trend that will continue to impact all areas of finance. Banking as we know it today is inherently inefficient with business models and cost structures that are mired in the 20th century," say Renton.

For sure the lending landscape is rapidly changing, in large part due to the peer-to-peer lending space, says David Bakke, a financial expert with MoneyCrashers.com. "Traditional banks and other lenders need to take note now in order to remain competitive."



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Comments
11 Comments.
Comment #1 by Anonymous posted on
Anonymous
I never understood P2P lending from a lender's point of view, as it's totally unsecured. But people ponied up money due to the novelty and the (so called) protection from many diverse loans. Looked like just another Internet fad.  But now their business model is shaping up:

1) Create a highly efficient lending model
2) Hype it up so that people will lend (at least initially)
3) Become a clearinghouse for Bank lending. 

As an individual, I know my "loan" to an FDIC account is protected. As we know, Banks are protected by taxpayer dollars, so they can risk unsecured loans. 

So, maybe the P2P companies have come up with a more efficient lending machine. Reminds me of "nextcard" the first online credit card application. Nextcard didn't end up very well (see wikipedia), but online credit card applications became the norm. Will be interesting to see if the P2P lending technology has lasting impact, and if the original companies survive.  

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Comment #2 by Anonymous posted on
Anonymous
I tried it 2 times and lost money instead of making money, no more for me, good idea but not workable, there are lots of crooks who get the loans just to defraud you and than stop paying back the money.

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Comment #3 by Anonymous posted on
Anonymous
I guess you all think that Wall Street Banks are good upstanding citizens then?

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Comment #4 by Anonymously #1 again (anonymous) posted on
Anonymously #1 again
In the world of money, there are few "good upstanding citizens". The goal should be to protect and advise the rest of us. There should be no secrets in the trade-off of risk vs. reward. 

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Comment #5 by Anonymous posted on
Anonymous
So 3 years ago when I came here & mentioned how I was getting great returns at Lending Club..................people either outright called me a liar or completely rubbished the idea of investing in these "unsecured" loans or how the whole house was surely going to be tumbling down. Now, 3 years later the house hasn't tumbled yet.....................& now the people who run the site are finally coming around to this?? Finally opening up your minds just a tiny bit? Or is it capitulation at the 2% or less returns you guys have been getting all these years? What comes next, articles about the stock market? :)

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Comment #17 by P2P is gambling (anonymous) posted on
P2P is gambling
You (probably) weren't a liar. You were just lucky. P2P loan diversification is similar to mortgage CDO's but without anything to secure the loan. And if you remember the recent banking crash, you'll know that mortgage CDO's turned out to be corrupt garbage.

2
Comment #6 by Anonymous posted on
Anonymous
Peer-to-peer lending has been around since the dawn of time and it was personal and local. The current online version is not much more than a pseudo-bank transferring cash from willing investors to unknown recipients with no collateral. Let's see how well the first peer-to-peer lending bankruptcy goes before claiming victory. Universal home ownership was a great idea until someone realized the dream was underwritten by fantasy loans. If I'm not mistaken, the Fed is still vacuuming up those loans each month.

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Comment #7 by HoHo (anonymous) posted on
HoHo
I made about 30 loans on prosper and 3 went bad.  My rate of return was a little over 5.5%.   I had to spend a lot of time researching and bidding on loans.  In many cases I did not put in bids that were high enough to fund the loans.  For me it wasn't worth the time I had to invest and wondering how many loans were going to default.   My return may get a little higher after I receive some payouts form a class action suit that Prosper recently settled. 

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Comment #10 by Anonymous posted on
Anonymous
all personal debt at the end of the day to SOME degree in the US is unsecured- there is no debtors prison and you have risk- even on a mortgage.  Spread your risk over multiple platforms- if you dont like P2P dont use it- but dont come on a site as a random troll and say its rubbish 

1
Comment #11 by Anonymous posted on
Anonymous
In reading some of these posts it appears the majority is down on P2P. However, those that were displeased were ones who did not diversify - either boy choice or because they owned just a handful of loans. Other's mentioned the lack of time and knowledge to research the offerings adequately. All valid challenges.

What should be considered is investing in a Fund structure (Limited Partnership) that focuses on the P2P space and holds (invests directly in) hundreds or even thousands of underlying notes. It offers the diversification and the due diligence process should be a little less cumbersome. RIAs like Lend Academy Investments focus solely on this space and even offer SMA services for those investors wishing to have their assets individually managed.

Millennium Trust Co, a qualified custodian for Alternative Investments, is the leading provider of custody services for the P2P space - both at the end investor and Private Fund levels.

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Comment #12 by Anonymous posted on
Anonymous
If you have to play Russian roulette on the loans and pick and choose, sooner or later you will be burnt. The evil people prevail at the end.

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