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."
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.
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."