What niche? The booming market of P2P lending is on track to reach $77 billion this year. That’s a staggering 1500% growth, in part powered by the entry of the traditional finance houses – banks and investment funds – attracted by the higher-yielding loans. The market is still relatively small compared to the overall commercial loan market of $3 trillion, but at these rates it is fast becoming… dare I say mainstream? And while all of us probably know more people and businesses with bank financing than with P2P financing, that imbalance is likely to correct and even move the other way over the next few years. The fact that some of the big players already quote on the stock market (Lending Club and OnDeck in the US, LendInvest soon in the UK) gives the sector a veneer of respectability and acceptance that is almost institutional. And check out this Google Trends graph of online search queries for “p2p lending”:
Now, the success and extension is still quite local, as in, specific to the UK and the US. In Spain, where I live, we have some interesting entrants into the sector as well a scant few consolidated players, and I’ll talk more about this in a different post. P2P lending is now a “thing” worldwide. But outside of the US and the UK, lenders are still having trouble finding enough solvent borrowers willing to air their financial needs in public. Outside of the US and the UK, there are considerable cultural as well as regulatory hurdles to overcome.
The sector is nowhere near mature yet. But it is showing signs of consolidating. While new entrants come on the scene, others are being bought, or are themselves doing the buying. Some end up closing down as they run out of working capital.
So where’s the innovation going to come from next? Niche markets. If the original niche market is heading towards mainstream, it makes sense that it will develop its own niche markets. If you want to break into a sector, how do you compete with the big boys? Through technical innovation, or by specializing. In this case, the big boys are already at the forefront of technical innovation. So, specialization it is.
Here are some interesting examples:
- Abundance Generation lets you lend to energy projects in the UK, as does the Trillion Fund.
- BTCJam and Bitbond are global peer-to-peer lenders powered by Bitcoin.
- Landbay is a peer-to-peer lender focussed on mortgages for the buy-to-let market in the UK.
- Capital Stackers in the UK focusses on property development.
- Apple Pie Capital offers marketplace loans for franchise businesses in the US.
- Fruitful in the UK offers savers the chance to lend to business mortgages.
- The German company Friendsurance operates a peer-to-peer model for insurance.
- Buy2LetCars funds lease vehicles in the UK.
- Studentfunder in the UK channels loans for masters and professional courses.
- Lendlayer in the US lends to people who want to learn a programming language.
- Common Bond helps students in the US refinance loans, and channels funds to graduate student tuition.
These niche players are still all relatively small. And in P2P lending, the scale of adoption matters in profitability, given the relatively low margins. But, the niche players have the strong advantage of the network effect: being a big fish in a small pond, if you will, becoming known within their specialized sector. This reduces customer acquisition costs, and the chances that borrowers and lenders move to another platform – customer loyalty in this sector is notoriously low.
But what does the future hold for these P2P “verticals”? Many will probably end up getting bought by the bigger platforms that want to consolidate their sector leadership and broaden their user base. Others will merge with peers, and some will end up closing, defeated by high customer acquisition costs and cultural barriers.
What about sector diversification? Will the “verticals” get as creative as the crowdfunding niche players did?
No, that’s unlikely. While both crowdfunding and crowdlending are based on the same principle – funding without banks – their priorities and focus are very different, and that affects the motivations of both the platforms and the participants. With crowdfunding, you develop a community of like-minded people, generally creative types and early adopters, who enjoy helping worthwhile or even just fun projects get off the ground, especially if they get to participate in the profits and/or enjoy the product. This has led to a growing ecosystem of music funding platforms, book publishers, fashion designers and innovative businesses that facilitates communication and connection. This, in turn, engenders a sense of belonging, loyalty and meaning.
With P2P lending, the priority is much more on percentages, on profitability, on statistics. The focus is on the return on the investment. Leaving your money in a bank is safe, but offers a very low return. Higher returns tend to be riskier. P2P lending offers a comfortable middle option: a relatively low risk, with a higher-than-bank return. It’s unlikely that a P2P lending platform to fund music albums would take off, for instance, because lenders would want to know the default rate. Will this album make enough money to repay the loan? Will this book generate enough sales? With creative projects, there is a lot more uncertainty.
The increasing securitization of the P2P sector is a firm indication, if one was needed, that it is much more “impersonal” than crowdfunding. With securitization, loans are bundled and sold in a group as a financial instrument. Investors, usually institutional, buy the bundle for its rate of return. They really don’t care about the underlying loans.
Which means that the niche players are not actually competing against others within their niche. They’re competing against all P2P players. If you don’t really care who your loan is going to, if what you look at are the statistics, then a P2P platform focussed on student loans is not that different from one based on commercial mortgages or one that funds working capital. The return on the funds matters, not their destination.
Unless… I do believe that among the great advantages and even motors of alternative finance are the chance to get involved, the empowerment of both borrowers and lenders, and the increase in easily accessible investment opportunities. And, given the chance, even return-focussed investors would choose a worthwhile project that makes the world a better place, given the opportunity, at least as part of their portfolio.
- Kiva has been matching lenders with low-income borrowers since 2005. Originally aimed at financing entrepreneurs in developing economies, it now also channels loans to local small businesses.
- Vittana facilitates crowdfunded loans to students in emerging markets.
- Zidisha allows lenders to connect with low-incoe entrepreneurs in developing economies.
- Energy in Common is a US platform that channels marketplace microloans to individuals and businesses in Africa, who want to install renewable energy generators or clean energy solutions (such as new ovens) in their homes and businesses.
These niche P2P players and other platforms like them will hopefully play an increasing role in economic development in regions that need it most. The repayment rate is high. So is the feel-good factor. And when you can combine finance with a relatively high return AND a feel-good factor, you are looking at an original funding system with a lot of potential.