Something finally happened last year. Despite further critique by the naysayers, despite years of people having called peer to peer lending a ponzi scheme or comparing it to junk bonds, despite some undeservedly declaring it a financial bubble, last year we finally turned a corner in the story of online lending.
Peer to peer lending finally became accepted. In 2013, it became cool.
This is not to say it is yet popular. Far from it. Most people I encounter are still unaware that peer to peer lending even exists. However, in 2013 the national investment community finally took a long hard look at platforms like Lending Club and Prosper. After years of veritable positive press and answered critics, the financial world finally opened up their wallets and took a seat at their table.
Peer to Peer Lending in 2013: Three Seismic Shifts
The national shift in favor of p2p lending was evidenced by three major co-occurrences.
#1. Wealthy Financial Institutions Entered the Arena
Most notably, 2013 saw the entry of some of the largest financial institutions in the world wanting a piece of p2p action. Their investment came in two different ways. First, major backers bought equity in the platforms themselves, like BlackRock did in September when they joined Sequoia Capital in backing Prosper as a company (read NYTimes). For those who might be unaware, BlackRock is the largest manager of money worldwide (Wikipedia: $4T in managed assets. Yep, T for trillion).
Second, we had financial institutions become the main source of funding for individual loans. For years, individual retail investors like myself were the way peer to peer loans got funded; not anymore. Marc Prosser said this best when he noted how 2013 marked the evolution of ‘P2P Loans into Consumer Loans‘. While most sites (including this one) continue to refer to this asset class as peer to peer lending, Marc’s point was a good one: the game has fundamentally changed. Lending Club & Prosper issued a combined $300 million in loans in December 2013. 43% of all the loans issued ($130m) came from loans purchased whole, that is, through a program that caters to the deepest pocketed investors. This, combined with their investing on the main (fractional) loan pool, made institutions the largest presence on the platforms today, a situation that should become more and more dramatic with each year that goes by.
#2. Google’s Investment in Lending Club in May
Secondly, we had Google purchase a share of Lending Club as a company (NY Times), legitimizing peer to peer lending even further. Their investment was for $125 million, five times the size of BlackRock’s in Prosper. This 7% purchase of the company valued Lending Club at a staggering $1.55 billion. However, more notable than the valuation was the action of the investment. You see, Google is a company that is nearly synonymous with the internet itself. As operators of search and YouTube, Google has a distinct ability to see where the world is heading, and a $125 million investment in Lending Club was not just a validation of the company, but additionally a gesture of eagerness towards peer to peer lending as a whole.
#3. Lending Club & Prosper Crossed $4 Billion in Issued Loans
It is good to highlight why all this outside big-dollar interest happened at all, specifically in how 2013 was a year of phenomenal growth for the platforms themselves. Compared to 2012, Lending Club and Prosper experienced a combined growth of 177%, nearly tripling their loan volume in twelve months, pushing them past the $4 billion dollar mark in total issued loans.
Lending Club: Looking at each platform, it is good to note that Lending Club finally became cash-flow positive in late 2012, so 2013 saw 12 months of reaped profits after years of burning through investor cash. The last twelve months saw this company become one of the largest issuers of loans nationwide (issuing $2 billion in 2013 alone), a far cry from its 2007 start as a humble Facebook app.
Prosper: Early 2013 saw Prosper reborn under a fresh management team. This new leadership (Stephan & Aaron Vermut and Ron Suber) did a remarkable job at pulling Prosper out of its late-2012 financial tail spin. Not only did they successfully settle the company’s notorious and burdensome class action suit, but more notably the Vermuts and Suber completely restructured Prosper around prime borrowers under a new FICO-based credit model, a solid foundational decision that should help Prosper grow in public trust and compete with Lending Club for the national spotlight in 2014.
5 Possibilities for Peer to Peer Lending in 2014
All this to say, 2014 looks to be the most exciting year in peer to peer lending’s history, full stop. Here is what’s going to happen:
#1. Lending Club Will Have Its IPO (Triggering the Blue Sky Exemption)
As previously covered by major news sites (including Forbes: Lending Club with IPO in Sight), 2014 looks to be the year when Lending Club has an initial public offering, which means it becomes a public company traded on the stock market. This holds promise to be a huge day for everybody at Lending Club. Considering how the company has a current value of $2.3 billion (placing alongside tech companies like Twitter and Pinterest) going public could rocket this value even higher, establishing Lending Club as one of the most valuable tech companies in the world.
A side-result of Lending Club’s coming IPO is how it will institute a so-called blue sky exemption for investors nationwide. Currently, Lending Club has had to approach each state’s financial regulators individually in order to allow investors of those states to gain entry on the platform. This is why Lending Club does not currently allow lending in 24 states (including populated states like Texas and Ohio). However, the coming IPO would trigger an exemption that would allow investors in every state access to Lending Club (despite their regulator’s naysaying), which could result in a lot of people becoming new investors at Lending Club.
#2. Prosper Will Become Cash-flow Positive
In late 2012, Prosper’s future was in doubt (see the dip in monthly originations above). Yet, just twelve months later, Prosper is poised to stop burning venture cash and hit profitability in 2014 (congrats guys!). This looks to be a remarkable turnaround for the peer to peer lending underdog, and a great setup for them to go toe-to-toe against Lending Club in 2014.
Though I rank this second in significance to Lending Club’s IPO, it is a very close second. Competition between two profitable peer to peer lending platforms is a critical necessity for an excellent overall experience for everyone involved, both borrowers and lenders.
#3. P2P Platforms Could Issue $6-7 Billion in Loans in the Next 12 Months
In the past year, the platforms issued a staggering $2.4 billion in loans (see Lend Academy), a growth of 177% in a single year. If current trajectories continue, I calculate that the coming year may see Lending Club issuing $5.5 billion in loans, with Prosper issuing a wonderful additional $1.2 billion on their own, totaling a possible $6.7 billion in issued peer to peer loans in 2014.
Honestly, I don’t know the full implications of this much issuance, other than how it may help continue to solidify peer to peer lending as a legitimate investment in the eyes of the nation.
#4. Big Changes Will Arrive for Retail Investors
One thing that I feel has not been given enough exposure is how peer to peer lending may change for the average retail investor in the coming year. I personally feel 2014 will be a huge year for retail investors in regard to the creation of (1) new data tools and (2) a wider use of API.
Exciting New Data Tools: While we have certainly been blessed by sites like LendStats and NickelSteamroller over the years, I think this year will see the launch of more savvy and exciting analytics for retail investors. While tools like NickelSteamroller’s Lending Club Return Forecaster have been crucial in our success as lenders, I think additional tools are going to emerge that really take this whole investment to another level. For example, Lending Robot does amazing stuff with Lending Club’s historical data.
More Widespread Investing via API: It is no secret that the best notes are not being bought over the LendingClub or Prosper websites, but are being snapped up by servers over API (read more in the final sections of this article). As Lending Club and Prosper continue to allow easy access to API for those who want it, I think we will see this medium grow more numerous and competitive with each passing month. I have heard rumors that some API servers have relocated to the same cities as Lending Club & Prosper’s servers to decrease purchase latency, and personally speaking, my own API investments of low-grade notes at Prosper have become more difficult to execute in the past few months, evidence that more and more investors are going this route.
#5. Other Various Possibilities: New Media, Taxes, and the SEC vs. P2PAutoInvest5000.com
Finally, I think 2014 may see a few additional items of interest, specifically (1) the launch of additional media sources, (2) the refining of tax strategies, and (3) new regulatory action against unaccredited tool sites. Regarding new media outlets, I would not be surprised if financial sites like Forbes or the Wall Street Journal create new peer to peer lending-specific channels. Furthermore, we may see the launch of big-dollar versions of sites like LendingMemo or Lend Academy that focus on lender education and news.
I think 2014 could be the first year where Lending Club and Prosper get their tax procedure figured out. Each April has meant a coming headache for the retail investing community, and this April looks no different. Is it possible that the platforms may finally get things simplified by the end of the year?
Regarding regulation of tool sites, I have been a bit concerned by the number of peer to peer lending sites that are charging fees for the auto-bidding of notes, yet are not registered as financial advisers with the SEC (Wikipedia). I think the coming year may see the first cease and desist letter or lawsuit being issued against one of these sites for the first time. This would, of course, send shock waves throughout the retail investing community, causing people to rethink their investment approach for the coming year.
Conclusion: 2014 is Gonna Be Huge
What a significant year 2014 looks to be! Billions of dollars in new loans, new tool sites and articles, exciting new features by the platforms, and more solid coverage by national media. Perhaps most importantly, 2014 looks to be another year when thousands of borrowers get access to low-interest loans and thousands of investors get access to solid stable returns. As the internet continues to remove the corrupt and wasteful banking institutions, I am eager to see the sleek and savvy reality of peer to peer lending take its place.