Internet technology, innovation and vision have enabled a new model for financial services that, in just eight years, has generated well over $5 billion in loans to American consumers and small businesses. The most enthusiastic backers are predicting a trillion dollars a year in “marketplace loans” being made by 2025. Wild as that might sound, this year’s developments suggest that prediction is within the realm of possibility.
Peer-to-peer (P2P) lending was the initial entry in the field, with Prosper (2006) and Lending Club (2007) leading the way. Online loan applications and risk assessment algorithms streamlined and hastened the process for borrowers, who were offered more attractive rates than credit card companies were giving for cash advances. Lenders could choose the loans they wanted to make, with interest rates based on the riskiness of the loan and payments handled by the lending platform.
Lending Club is the largest P2P lender, facilitating a billion dollars in loans during Q2 of 2014; in August it filed for an IPO with the SEC. According to the company, their lenders have realized an annual net return of 8 percent, after accounting for fees and unpaid debt. And those fees pour about 5 percent of loan volume into the company’s coffers.
The success of P2P lending has inspired a growing number of variations focusing on different borrowing sectors (online business, small business, student loans, etc.) as well as companies that dispense with the P2P aspect for more of a standard, online investment model.
The early maturity of P2P and online-lending in general, has led to a frenzy of investment — many hundreds of millions this year alone — by large financial institutions and hedge funds. In a manner reminiscent of the cooption of Bitcoin, as many as a dozen investment firms have been created specifically to engage in P2P lending, complete with high-speed trading algorithms designed to cherry-pick the best borrowers.
Though this does diminish the peer aspect of the loans, such lending is still likely to affect the practices of traditional banks in ways that bring down the cost and accessibility of borrowing.