At Prosper, which has been courting institutional lenders over the past year, more than 80 percent of the loans issued in March went to those firms.
Excerpted from Amy Cortese:
“As the industry matures, a new class of investors is storming the P2P gates, and they include the very institutions that P2P had set out to bypass. Today, big financial firms, not small investors, dominate lending on the two platforms. At Prosper, which has been courting institutional lenders over the past year, more than 80 percent of the loans issued in March went to those firms. More than a dozen investment funds have been formed with the sole purpose of investing in peer-to-peer loans. P2P sites are also attracting some of Wall Street’s biggest names as board members and investors, and investment banks are vying to manage Lending Club’s hotly anticipated initial public offering.
The influx of institutional money has supercharged the sector, allowing Prosper and Lending Club and a host of newcomers to extend more loans to more borrowers. Lending Club figures that it has saved borrowers $250 million in interest charges. The two platforms say they have made more than $5 billion in loans to date and have been doubling in growth every year.
But investor demand is now outstripping the loan supply, spurring fierce competition among investors to snatch the best loans first. And the original P2P investors — the dentists, dabblers and stay-at-home moms who helped establish the market — are finding themselves outgunned by the cash-rich, algorithm-wielding arrivistes.
P2P insiders say the new institutional investors benefit the industry. “It will drive competition, drive down rates and allow us to serve customers better,” says Alex Tonelli, a founder and managing director at Funding Circle, a San Francisco-based P2P market for small-business loans.
Still, the Wall Street makeover — some would say takeover — of P2P lending is raising concerns as the new players begin securitizing loans and clamoring for more. Insiders predict a day when the loans are regularly sliced, diced and securitized, hedged, traded on secondary markets and tracked by exchange-traded funds.
At the very least, the big players’ entry runs counter to the original notion of P2P lending as a populist alternative to the high stakes world of Wall Street. The term “peer to peer” has become something of a misnomer. Some of the latest lending platforms are ditching individual investors altogether to focus on big lenders.
Acknowledging the growing role of institutions, Ron Suber, the president of Prosper, says the industry as a whole is better described as “Online Consumer Finance.”