Peer-to-peer (P2P) lending became one of the hottest industries in fintech – or any other industry – in 2015. Companies launched big rounds of venture capital, investors found unicorns and there have even been a few IPOs.
Will 2016 continue this trend or will the P2P lending bubble finally burst?
Here are some of the highlights from 2015:
- Loan Club became public in December 2014 at a valuation of 9 billion dollars; the stock traded as high as $ 24 in 2015, with a market cap of around $ 15 billion.
- On the bridge became public at $ 20 in December 2014, and was trading up to $ 28, with a market cap of around $ 1.8 billion.
- Prosper raised $ 165 million at an estimate of $ 1.9 billion (April 2015).
- Fundraising circle raised $ 150 million around a valuation of $ 1 billion (April 2015).
- Before raised a spin of $ 325 million around a valuation of $ 2 billion (September 2015).
- SoFi raised a $ 1 billion round at a valuation of around $ 3.5 billion (September 2015).
- cabbage raised $ 135 million at an estimate of $ 1 billion (October 2015). Disclosure – I am an advisor to Lumia Capital who is an investor in Kabbage.
- To lend raised $ 150 million at unknown valuation (January 2016)
Prosper Just announced its figures for 2015. In the past year, Prosper granted $ 3.7 billion in loans (including $ 1.15 billion for a record fourth quarter). This growth was double that of the previous year, with revenues of over $ 200 million in 2015, up from $ 81 million in 2014.
Lending Club has yet to release its figures for 2015, but it is estimated that they will have generated more than $ 8 billion in loans, as they had already made $ 5.8 billion in the first three quarters of 2015.
As Lending Club and Prosper disrupted the personal lending space, companies like OnDeck, Kabbage, and Funding Circle became brands in the small business lending space. SoFi took on the student loan space and quickly became the largest provider of student loan refinancing.
The creation of the P2P loan
After the 2008 financial crisis, banks began to tighten their consumer credit policies. The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 added even more restrictions. Gone are the days of getting cheap and quick loans, and consumers found it very difficult to get loans even though they had good credit.
Several factors will determine whether the rapid growth in peer-to-peer lending continues.
This inefficiency has led to the emergence of online lending sites like Prosper and Lending Club, the first major players to really emerge in the consumer space. They offered consumers the possibility of obtaining loans easily and quickly. To minimize risk, they focused only on consumers with high credit scores, and the typical loan amount ranged from $ 20,000 to $ 30,000.
As Lending Club and Prosper attacked consumer lending, OnDeck, Kabbage and Funding Circle attacked the small business lending space. They focused on business loans ranging from $ 100,000 to $ 200,000 for businesses that wanted to pay for inventory, franchises, equipment, etc.
As these online small business lending sites have grown, loans from the big banks have declined dramatically. According to bank regulatory documents, the top 10 banks lent $ 44.7 billion in 2014, down 38% from the peak of $ 72.5 billion reached in 2006.
The future of P2P lending
Several factors will determine whether the rapid growth in peer-to-peer lending continues:
Rising interest rates. Most experts believe that as interest rates rise, so will the number of defaults. They believe it will burst the bubble in the lending space. The Fed has already started raising interest rates. However, as long as the economy is doing well and unemployment is low, the number of defaults is unlikely to increase as much.
Regulation. Regulators are constantly watching this space, especially since the terrorist / shooter from San Bernardino got a loan of $ 28,500 from Prosper a few weeks before he killed 14 people on December 2, 2015. Prosper granted the loan after all paperwork and background checks were completed. Although Prosper is not under investigation, the government is currently reviewing additional regulations to prevent terrorists from obtaining loans.
Competition from banks. While Goldman Sachs decided to create his own loan site, most of the other big banks have decided to partner with the existing credit companies. JP Morgan recently announced a partnership with OnDeck Capital which will enable it to outsource business loans of less than $ 250,000 to the OnDeck platform.
Other banks, such as BBVA, Credit Suisse and JP Morgan, invested directly in Prosper’s latest round of funding, while Silicon Valley Bank and Norwest Venture Partners (Wells Fargo is Norwest’s only LP) invested in Lending. Club.
The size of the market. How big is the loan market? Lending Club’s IPO file cites the size of the consumer credit market at $ 3.2 trillion, of which $ 380 billion would be eligible for Lending Club’s lending policy. Credit companies can also target verticals such as auto and medical loans – indeed, Prosper recently acquired American Healthcare Lending.
International markets could also be a great opportunity, but, with the exception of Funding Circle, most of the sites are focused on the domestic market in the United States.
P2P loans in 2016
Lending sites in 2016 will continue to post impressive numbers. Rising interest rates shouldn’t slow things down until the economy collapses and raises unemployment significantly. The absence of default due to rising interest rates is also expected to lead to a rise in Lending Club’s share price.
We could also see IPOs of Kabbage, Prosper, Avant and SoFi in 2016, with potential acquisitions from major banks, as well as card associations like MasterCard, Visa and Discover.
However, don’t be surprised to see Internet consumer companies like Google, Facebook, or Amazon stepping into this space and partnering or acquiring existing lending sites. These Internet giants would have great synergies with lending sites – and would be able to offer these loans to many more consumers.