Rare is the day when there isn’t an article about P2P lending somewhere in the financial or even the mainstream press, usually on the front page. I’ve written before about the hype around the term, and I understand how labels can stick. But it is becoming increasingly clear that “P2P” just isn’t applicable anymore when it comes to alternative financing. It’s time we called it something different.
In case you’ve been living in a cave recently, a brief introduction: P2P lending became possible with the launch of platforms that bring together people and businesses that need money, and lenders who want a higher rate of return than the banks can currently offer, with less risk than the stock or bond markets. A very simple idea with far-reaching consequences, in that it is filling the void the banks left when they more-or-less pulled out of the small and medium business loan and the consumer loan markets. It is filling the void with such success that, in the UK and the US at least, it has financed well over $3 billion, and is encroaching on the bank’s market share. And, more importantly, it is increasing returns on savings, and facilitating spending by individuals and small businesses. Good for the economy, right?
Right. The UK Government is actively encouraging P2P lending, in a thinly-disguised dig at the banks’ reluctance to lend and the consequent dampening of the much-needed economic recovery. In 2012 it pledged over £100 million to alternative financing schemes, mainly through UK platforms Funding Circle (small business loans) and Zopa (consumer loans). And it is considering making the interest earned on these loans tax-exempt. Across the ocean, earlier this month the US Securities and Exchange Commission approved measures to make it easier for individuals to invest in loans.
The increased transparency, efficiency and returns are indeed attractive, and the risk is significantly lower than other high-return investments. Understandably, this has attracted the attention of the institutional investors. One of the “democratic” cornerstones of the P2P platforms, one of the advantages that appealed to individuals, was that they could invest small amounts (sometimes as low as £10) in a diversified range of loans. Businesses and people looking for financing would get it from several, sometimes hundreds of investors. In 2008, all of the loans on Lending Club and Prosper (the two main US platforms) were fractional, as in small lenders contributing small parts of borrowers’ needs. In 2014, only 35% were fractional, which implies that 65% of the more than $3bn loans were snapped up by individual entities. At those amounts, it’s almost certain that those entities are institutional investors.
That data comes from Orchard Platform, a startup founded in 2013 that links institutions to marketplace lending. If the existence of a platform such as Orchard weren’t enough of a give-away that the big financial institutions want to muscle in on the alternative lending market, the fact that two of its main backers are former CEOs of Citigroup and Morgan Stanley should clinch it.
And the evidence continues to mount. Earlier this year, the world’s largest asset manager BlackRock bought $330 million of consumer debt through Prosper, the world’s second largest lending platform. Last month Funding Circle announced that Victory Park Capital, a US-based asset manager, will finance up to $420m of small-business debt through its platform over the next three years. Nearly 50% of whole loans on Prosper are being snapped up in minutes by professional investors, with the highest-risk (and highest-yield) ones going the fastest.
Now, in no way can institutional investors be called “peers”. They’re not interested in the social statement of bypassing the established gatekeepers and of mutual community support. They’re in it for the profits. So, is this the end of the P2P lending model as we know it?
No, there’s no reason why it should be. Their money is just as good as anyone’s, and if their participation in the lending platforms increases funding in general, giving opportunities and helping money circulation, then everyone benefits. The nature of the platforms is unlikely to change because of the investment institutions’ involvement. But, we do need to stop calling it “P2P lending”. (In Spain we call it “crowdlending”, which can still hold, especially as the institutions have not yet gotten involved.)
As with Amazon, Uber, Airbnb, eBay, etsy and a long list of successful “new economy” businesses, the Internet facilitates connections. With lending platforms, it brings together borrowers and investors. It works by offering a selection of lending opportunities to the market in general. Interested investors sign up. It is, in all senses, a marketplace. Obviously one with rigorous controls and checks, since a lot of money is in play. But it is a marketplace, where sellers (those that have an investment opportunity to offer, ie. the borrowers) connect with buyers (those that are looking for a reasonable return on their money, ie. the lenders). “Marketplace lending” is perhaps less sexy, less hype-y, less “sharing economy”… But it is more inclusive, more flexible, and above all, more accurate. And surely we want our financial innovators to be accurate? We are talking about money, after all.
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