The Evolution of P2P Lending: A New Frontier for Finance
Recently, Prime Meridian was featured on Lendit.co. In preparation for the upcoming conference in April in NYC, Lendit is featuring their different sponsors on their blog. Read the submission below-
As P2P lending continues to grow, new variations on alternative lending have emerged ranging from different segments including small business lending, real estate, student loans, and specialized financing to loan sourcing that comes primarily from institutional investors as opposed to “peers”. With the evolution of p2p lending into a broader structure, comes a more appropriate name: Marketplace Lending.
Definition of Peer-to-Peer Lending
Peer-to-peer lending is the practice of matching borrowers and lenders through online platforms. Borrowers are often able to gain access to funds quickly, and typically at lower interest rates than banks, making it an attractive loan alternative comparative to banks. The loans issued are often comprised of many different investors ranging from individuals to institutional investors.
Individual and professional investors benefit by being able to lend money at a range of interest rates based on proprietary credit scores assigned by each platform. Since investors typically fund only a portion of a loan and spread the amount they loan across many buyers, investors can potentially receive steady, attractive returns while spreading risk across multiple borrowers.
P2P lending has experienced rapid growth as borrowers look for alternatives to banks. As a result, the largest P2P lending platform in the US, Lending Club, went public in December 2014 with a successful IPO. Other platforms, such as OnDeck, have gone public as well, with many in line to do the same.
Definition of Marketplace Lending
The broader name, Marketplace Lending, is synonymous with P2P Lending and encompasses all of the forms of p2p lending on various platforms. Suggested by Renaud Lalplanche, CEO of Lending Club, at the Lendit conference last year, he felt that the term “marketplace lending” could be less confusing to some that don’t understand the definition of p2p lending.
“Peer-to-peer lending and marketplace lending are essentially synonymous. Many mistakenly believe that “peer” means small retail investor, and they cried foul when large institutions entered the space. In IT networking lingo, a “Peer” is simply an end user, regardless of size, that has equal access to a distributed application architecture network”, says Don Davis of Prime Meridian Capital Management.
Foundation Capital, a venture capital firm specializing in financial technology and marketplace lending opportunities, believes that “Marketplace Lending…is fundamentally about creating platforms to connect borrowers with lenders” with technology making it possible for “…third part(ies) to match idle supply and demand.”¹
The marketplace lending space
It is important to keep in mind that these new marketplace lending entities are generally not government regulated in the way banks are. While it creates potentially more risk, it also makes them potentially more nimble, enables them to operate at lower costs by not having to follow all of the same compliance and regulatory requirements, and to innovate with technology at its core.
Every month brings out new forms of alternative lending and financing all utilizing advanced technology to create more efficient and automated means of reviewing, processing and issuing loans. A recent report by Goldman Sachs “The Futures of Finance: The rise of the new shadow bank (Part 1)” recently detailed the sea change in financing and how banks are losing ground to marketplace lenders.
Source: Goldman Sachs “The Futures of Finance: The rise of the new shadow bank (Part 1)”
As this class grows, investors have more opportunity to participate without having to invest in the company directly, but uniquely in the actual loans themselves. Beyond marketplace lending, there is the emergence of FinTech, innovation in financial technology, of which marketplace lending is a part of.
Hear Don Davis, managing principal of Prime Meridian Capital Management present the topic “Asset Allocation: Where Does the Asset Class Fit?” at LendIt USA 2015 on April 15th at 9:15am.
About Prime Meridian
Prime Meridian Capital Management is an alternative investment manager specializing in marketplace lending including p2p lending and online lending platforms. The Prime Meridian Income Fund specializes in p2p consumer lending while the Prime Meridian Small Business Fund utilizes small business lending platforms. Prime Meridian Capital Management is an affiliate of Novus Investments, an alternative investment management firm.
¹ Foundation Capital, Whitepaper: “A Trillion Dollar Market By the People, For the People: How Marketplace Lending Will Remake Banking As We Know It”;
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