2016 was a year that brought new challenges to the peer-to-peer lending industry. Although the past year saw a reduction in total originations, we expect this to prove to be nothing more than a minor bump in the road on the way to P2P lending becoming a much larger financial force.
This industry, which has opened the door to an entirely different way of obtaining financing, is still dominated primarily by consumer lending. As the U.S. and global economies continue to gather positive momentum, P2P consumer lending should continue to have strong demand and small business and real estate lending could potentially stand to increase many times over. The demand for alternative financing continues to grow, and this form of financing may assume a more prominent role in everything from debt consolidation to medical costs to corporate financing.
By the fourth quarter of 2015, P2P originations were reaching over $1 billion per month. *Like other markets that experience very rapid growth, the P2P lending market at that point was looking a little frothy. Institutional demand for P2P loans was on the rise, and lending platforms were more than happy to try to keep up with that source of demand.
But when 2016 began, originations began to decline as the market started through some growing pains.
Among the early challenges faced by the industry in 2016; the Federal Reserve raised the Fed Funds rate in December of 2015 for the first rate hike in nearly a decade. The central bank then continued with further saber-rattling regarding higher rates, and this likely had a detrimental effect on P2P capital and investment. It is important to keep in mind that although the Fed just raised the Fed Funds rate by another 25 bps, it was not long ago that market expectations were for the Fed to hike rates not once or twice but four times in 2016.
P2P lenders began to realize early on this past year that they would have to make some adjustments in order to attract more capital, and some platforms began their own rate hikes on certain grades of loans. Other adjustments were made to the lending process as well to make it even more efficient and attractive to outside investors.
As the P2P lending market worked towards righting the ship into the second quarter of the year, the industry was hit by a major bombshell. Industry leader and publicly traded Lending Club became the object of significant scrutiny after several major issues within the lender were uncovered. The news hit the industry like a ton of bricks, and it not only raised many questions about internal controls, but it also further soured investor demand in the process.
Lending Club founder and CEO Renaud Laplanche was forced out after the discovery of governance failures as well as a lack of disclosure about a personal investment. The news hit the company’s shares hard, and put a significant dent in the industry as a whole.
The Lending Club debacle raised some significant concerns about the industry, and questions began to rapidly surface about platforms’ ability to maintain reliable sources of funding.
The industry pressed on, and the issues being faced by Lending Club likely only fueled further resolve by industry leaders to improve operations, secure more reliable sources of funding and increase transparency.
By the fourth quarter of 2016, the industry was showing some strong signs of recovery. Lending Club secured $1.3 billion purchase program from Credigy, a U.S. subsidiary of National Bank of Canada. **Online lending platform Prosper was in advanced talks to sell $5 billion worth of loans over the next two years in a move that would add further credibility to the industry and ease concerns over ongoing sources of funding. Some of the financial firms involved in the discussions reportedly included Fortress Investment Group LLC, Soros Fund Management LLC, Third Point LLC and investment bank Jefferies LLC. ***And Social Finance, or SoFi as it’s known, continues to originate approximately a billion dollars a month in credit across personal loans, student loans and mortgages. ****These top three P2P platforms combined were doing over $2 billion a month in originations at the end of 2016.
The P2P lending industry has the potential for a monster 2017 and for strong, steady growth in the years beyond.
P2P lending platforms have made significant strides in everything from underwriting to accounting, and many of the hard lessons from the last year have proven invaluable in making these platforms more efficient while improving loan quality and investor satisfaction.
A Donald Trump Presidency may even add fuel to the fire in the next few years. Equity markets have been rising on the notion of increased fiscal spending and tax cuts, both of which could be inflationary. Interest rates have risen since the November Presidential election, and monetary conditions have the potential to tighten further.
As rates rise and money tightens, individual consumers and businesses alike may seek out alternative sources of financing. With the P2P lending landscape looking much greener and with capital sources looking more reliable, the industry is well-positioned to take a large and significant step forward as it looks to cement its place in the world of alternative financing.