P2P lending bottleneck


#1

I just read this:

“a challenging situation that has been endured by most all US based online lending platforms: gaining sufficient access to capital to fund the demand for loans”

Is that true for P2P platforms? Is P2P lending growth being held back by a dearth of investors willing to fund loans at the highest rate most borrowers are willing to pay?


#2

Obtaining capital is a challenge for any non-bank lending business. The challenge isn’t finding investors per se; the challenge is finding consistent investors that regularly buy loans regardless of conditions. What LendingClub kindly demonstrated last May is that marketplace lenders should rely on hedge funds and private equity investors for capital at their own risk. Fast money can and will leave very quickly at signs of trouble, whether the trouble is from the platform itself (as in LendingClub’s debacle) or in the performance of the loans. That’s why forward sale agreements like the one Prosper recently executed could be a positive step, as the investors have apparently committed to some minimum monthly purchase of loans from Prosper (although the announcement was conspicuously silent on such important details as the amount of the minimum monthly purchase).


#3

Is there typically great demand for P2P loans with less than great supply?


#4

I’m not sure I understand your question, but if you are asking if there are mismatches between supply and demand for P2P loans in which to invest, then yes, that’s frequently the case. For a few years, there was much more demand for the lowest grade/riskiest loans than there was supply. For example, with yields approaching 30%, many investors clamor for the lowest two grades of LendingClub’s loans, but if you look at 2016Q4 issuance, the lowest two grades comprised less than 3% of their origination, with only ~2k loans amounting to $38.5mm. In fact, that’s why the Marlette platform exists: Colchis couldn’t get sufficient supply of the riskiest loans from LendingClub and Prosper, so rather than continue fighting for more allocation, they started the Marlette platform for themselves. The trick for the platforms is to find sufficient numbers of buyers for the higher grades/lower yielding loans, for which there is not as much demand.


#5

So the lowest grade loans are the most desirable for investors but the vast majority of borrowers qualify for higher grade loans which aren’t as desirable for investors?


#6

More or less. It’s actually the middle grades that have the highest issuance. From Lending Club’s 2016 Q4 origination, the numbers look like this (A is their highest grade, G the lowest/riskiest)


#7

So there are more B and C borrowers than there are investors and the rates for those loans can’t rise to attract more investors because borrowers would then be able to find better rates outside of the marketplace?


#8

That’s exactly right BY11235. I actually recently sat down with the CEO of LendingClub, and he did say that the actually there is high interest in providing funds to firms like LC because of the nature of the fact that cost of capital for banks is low and acquisition cost for LC and Prosper is low.

Up until the rocky year of 2016 supply and demand was actually fairly stable in this market for the big players like LC. The trick is to your point building more of those relationships like we are seeing at Prosper that get banks more invested. I see this supply of funds becoming less and less of an issue and more of a way of banks doing business in the future. The cost benefits to them are just too high.

The fact that Marcus from Goldman came to fruition is a sign that more banks better find ways to provide better rates or partner investments with marketplaces. That’s my feeling, but am open to thoughts.

Also, if you are interested here is the link to my discussion with Scott Sanborn: https://www.simpleinnovativechange.com/lending-hand-industry-need-chatting-p2p-marketplaces-lendingclub-ceo-scott-sanborn/


#9

P2P platforms need better clarification to understand demand, and capital access.

P2P ( peer to peer) which is not what most of these online platforms provide
infact this part of the market is a very small fraction

the largest piece is actually P2B ( Peer to Business). The big players who started with P2B are really now 90% I2B ( Institution to Business) what an irony :slight_smile:

Canada
UK
USA
Brazil
( from my discussions with operations of P2P, as I said are really P2B and I2B)

New entrants today will struggle to compete in this market and we will see consolidation in an effort to have access to larger Institutional Capital. There is not enough Peer Capital to meet the high demand in the marketplace.

P2P is really P2B = I2B