View from the US: marketplace lending is transforming credit

US P2P market

The $2.4B in loans issued in 2013 by Lending Club and Prosper alone is a big number, but it’s only the first straw to be placed on the proverbial camel’s back. The top five banks have a market capitalization of a trillion dollars; the next 30 banks together are worth another trillion. How big can marketplace lending get? According to our estimates, banks, credit cards and other lending institutions generate $870B+ each year in fees and interest from over $3.2T in lending activity.

That’s bigger than the automobile industry. It’s bigger than the airline industry. And it’s bigger than both of those industries combined. That’s how big marketplace lending can get.

We’ve seen consumers and fast-growing upstarts challenge entrenched industries before, either out of frustration with incumbents, or the convenience of the disruptor. Consumers tired of exorbitant and inflexible cable bills, for instance, cut their cords and turned to over-the-top services such as Netflix. Yelp offered context and convenience that the Yellow Pages never could. And after the financial crisis, credit card users exasperated by 15%-plus interest rates, depositors tired of interest rates of 0.36% on savings accounts, and investors tired of 0.12% Treasury bills started looking for alternatives – and discovered marketplace lending.

The future belongs to online marketplace platforms like Lending Club, Sofi, OnDeck, RateSetter and others that aren’t yet on the scene that will remake the industry by developing more efficient lending practices, making those products more convenient for borrowers in all verticals – from merchant cash advance to consumer. We believe marketplaces will redirect the $870B+ that retail banks charge borrowers towards better rates for borrowers and lenders while still making tidy margins for themselves.

Marketplace lending is not a radical concept – it’s a more efficient one. As new companies and marketplaces form, we expect that options for marketplace lending will develop for all manner of consumer and business loans, including consumer unsecured, real estate, education, purchase finance, business loans, and business working capital.

And this transformation is only beginning. Currently, less than 2% of lending revenue is being captured by marketplace lenders in all verticals.

Marketplace Lending’s potential doesn’t mean that retail banks will be pushed out of business. Instead, retail banks that choose to participate in the marketplace revolution will use their capital to fund loans on marketplace platforms – as banks such as Titan Bank and Congressional Bank have begun to do with Lending Club. (In South Africa, we’ve seen Barclays take a position in RainFin, in Australia, Westpac has bought into Society One, and in the UK Santander has partnered with Funding Circle.)

Instead of playing the role of intermediary, retail banks can become borrower lead generation sources and institutional investors. Other banks are starting to bring their own borrowers and capital to Funding Circle’s and Lending Club’s marketplaces to more profitably facilitate loans to their own customers.

 

In addition to Lending Club and Prosper, other marketplace lenders have also sprung up. These include SoFi and Common Bond for student loans and Kabbage, OnDeck, and Funding Circle for SMB loans. Even companies like PayPal and Square have started to offer direct loans to their customers. We expect more loan providers will follow, in these and other categories.

Foundation Capital