It has plans to do an initial public offering sometime this year. Treasurer, to an already substantial board that includes former Morgan Stanley titans John Mack and Mary Meeker. Lending Club, for example, received a $125 million investment from Google and added Larry Summers, the former U.S. Over the past year, they have been making headlines that illustrate as much. But those familiar with P2P say it is now in its "2.0" stage.Ĭompanies like Lending Club and Prosper, which helped create this niche, look much different than they used to.
If bankers are skeptical, the peer-to-peer sector's bumpy start could be partly to blame. QuarterSpot recently began working with banks in this way, paying an origination fee for the referrals. In his view, the opportunity for banks is in "monetizing their declines," by vetting these new types of lenders, partnering with reputable ones, and referring customers who get turned down for bank loans. "I believe this decade will see platform lending emerge to rival spread lending," he says. Ross predicts P2P is going to become a major force in lending and he says traditional banks need to figure out how they fit into the new paradigm. Ross says he generally buys loans that mature in a year or less, with interest rates ranging from 15% to 40%. P2P makes sense for sophisticated investors as well. Partly because they don't have the same regulatory burdens as traditional banks, the players in this space can use technology to evaluate risk in new ways and help borrowers that banks reject. Unlike the spread lending done by traditional banks, this platform lending model, as Ross calls it, makes starting a new bank-or at least the functional equivalent of one-easier than ever, he says. "They're like a bank without a balance sheet." They're lending other people's capital," he says. "The only thing they're not doing that a bank does is lending their own capital. He says P2P players do almost everything that banks do-market products, evaluate borrowers, underwrite and service loans. "People think of P2P lending as an Internet phenomenon, but it's not," Ross says. But it is all the more powerful in this new incarnation. It may not be fueled by "peers" as once envisioned. The way he sees it, P2P has created an entirely new bank model.
Instead of having individual mom-and-pop contributors risk small amounts, they line up big investors like hedge funds to buy their loans in bulk.īrendan Ross, president and portfolio manager at the hedge fund Direct Lending Investments, buys small-business loans from online lenders such as IOU Central and QuarterSpot for his fund. A few also are paying banks for customer referrals.Īnd some online direct lending startups, though still considered part of the P2P sector, do not use "peers" at all in the funding part of the equation. Now P2P lenders are starting to recruit traditional players in financial services-banks like Titan and institutional investors-to help fund their loans and fuel their growth. Some, like Funding Circle, are using the same model to offer small-business loans. Thanks to their success, more P2P startups are proliferating. They are growing fast, mostly through loans to consolidate credit card debt, and taking some of banks' best customers in the process. The pioneers in this space are moving past the early losses and regulatory hiccups that held them back for years. Though still a microscopic part of the estimated $11 trillion consumer lending market, P2P is going to matter in a big way sooner than you think, say those familiar with the sector. Websites such as Lending Club and Prosper, which match up consumers seeking to borrow money with other consumers willing to use their own money to fund those loans, are just not on their radar. But even as more bankers take sides on what some see as a newly emerging battleground, it's fair to say that most have given little thought to the P2P sector so far. At the other extreme, tiny Titan Bank in Mineral Wells, Texas, is buying P2P loans for its own portfolio in an unusual alliance with the largest originator in this niche. At Wells Fargo, some employees received an email late last year saying they cannot participate in P2P lending because companies in that space are considered part of the competition. Peer-to-peer lending is popping up a lot in banking circles all of a sudden, and reactions run the gamut.
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