The Future of P2P Lending - Dusting Off My Crystal Ball |
29 Comments |
Remember the good old days of 1998? The Internet was going to change everything. Analysts predicted that we were going to buy our books, music, pet supplies, and groceries over the Internet. It’s ten years later and the analysts were right about the first two and wrong about the last two. (Sure you can buy pet supplies and groceries over the Internet, but do you know anyone who actually does?) Over the last two years, peer-to-peer (P2P) lending has taken off. I’ve written extensively about Prosper and Lending Club. Though I initially wrote about Zopa, its product is similar to a certificate of deposit. How is the P2P industry going to look 3-5 years from now? That’s what I aim to find out.
Before we go into the specifics of P2P companies, let’s look at a bit of history. In many industries, you see two leaders battle it out - usually with one brand being consistently ahead - see Coke vs. Pepsi, McDonald’s vs. Burger King. There’s an occasional RC Cola or Wendy’s. They run solid profitable businesses, but they aren’t leaders in their industry. I see P2P lending companies following a similar formula. Let’s break it down by individual company:
- Prosper - The first mover is also the biggest player in the P2P industry. Prosper has an Ebay-like bidding process. In some ways it’s similar to a stock market maker like Nasdaq - it sets up a system and let’s buyers and sellers best determine fair pricing. I love this model and I see them in the role as Coke or McDonald’s - the leader with about 50-60% market share in the long term.
- Lending Club - Lending Club is the frisky challenger. With them you lend to people at fixed rates determined by their credit rating. You aren’t going to get a 15% return from a borrower with perfect credit, but you aren’t going to get stuck with 10% from a borrower with poor credit. It’s a little like Amazon, you see a price you like and you buy it. Lending Club has stricter guidelines for it’s borrowers and though it’s still early, their default rates are significantly lower than Prosper. Lending Club is growing rapidly and I can see them commanding 35-45% of the P2P marketplace.
- The Rest - This is where I’d include Zopa, Virgin Money US, and Loanio. As I mentioned earlier, Zopa is more of a CD - I’d rather invest at my local bank and help my own town. Virgin Money is focused on family and friends - a subset of what Prosper and Lending Club already do quite well. Details on Loanio - other than it being in perpetual vaporware-mode - are extremely hard to come by. Their challenge is to offer some new twist on P2P lending - otherwise the majority will stick to the more proven Prosper and Lending Club. In the end, I see these sites adding up to 10% of the industry.
Some people predict the fall of P2P Lending. I personally feel that eliminating the banks as a middleman is an extremely viable and potentially lucrative business plan. I could be wrong and all these companies could turn up like the next Webvan and Pets.com. I’m not expecting that as their overhead is very minimal.
Where do you see P2P Lending five years from now? Take a guess in the comments below (and then come back in five years to see how you did).
Further reading:
Image Credit: Griraffes
This post deals with: ... and focuses on:P2P Lending
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Propeller29 Responses to “The Future of P2P Lending - Dusting Off My Crystal Ball”
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October 9th, 2008 at 3:03 pm
I’m not really surprised since I wasn’t getting any help with my loans and that seemed to be their biggest selling point.
October 9th, 2008 at 2:25 pm
Who would guess that 6 months after you wrote this Zopa would fail. Crazy.
June 27th, 2008 at 6:54 pm
Sorry four pillars but we are in a recession. But for some reason know wants to say the “R” word. In the last 2 days the dow was off by 450 points food gas and gold are up. O and the dollar was down today also. So the loan and mutual fund industries are going to take a big hit for some time.
March 31st, 2008 at 6:49 pm
One of the changes I think you will see with p2p lending is more flexibility with length of loans. Why 3 years? You should be able to borrow for 1 month or 20 years.
This isn’t a prediction but if a recession ends up hitting the US then the profitability of most p2p portfolios won’t be very good which would really slow the growth of the industry. That said the mutual fund industry had some terrible times in the 70’s and 80’s when equity growth was awful and it eventually became a pretty big industry anyways.
Ernesto - hilarious comment.
Mike
March 31st, 2008 at 1:05 pm
Comment by predicting the future of P2P? OK here goes:
1. Blog readers the world over drop dead from boredom after reading the millionth time how they can get $25/$50/$100 just for signing up.
2. Participants realize lending money for profit is a job best left to professionals with deep pockets and not part time amateurs.
3. People en mass come to the conclusion P2P is a flee-bitten dog that should be kicked to death. Shortly afterwards they jump on the latest and greatest Internet fad and blog that to death.
See you in five years.
March 31st, 2008 at 7:11 am
I just read this post on http://www.mymoneyblog.com/archives/2008/03/prosper-p2p-lending-update-2-scary-graph-and-stats.html#more-1917
I didn’t know that there is a 20% chance that debtors will default.
March 30th, 2008 at 9:39 pm
Well now. Lets see here, you have Payday Loans thriving on the net, you Paypal thriving on the net with its “service for fees exchange” and you have even the U. S. Government ALLOWING eliminating their staff as your overseer of handling ONLINE Tax filings, with a larger amount of people every year getting on board, saving the USPS tons of money, did I mention the U S Govt?? So Prosper.com would be in trouble in this life? Ha don’t bank on it. Prosper.com business model is to P2P, what IBM did to the PC market.
March 30th, 2008 at 9:05 pm
I agree with you for leaving out Kiva and MyC4. They are interesting websites but they are about international development rather than P2P lending in an efficient marketplace.
I think that in five years the sites Prosper, Lending Club, and Virgin Money will still be around, but they won’t be as big as the current hyped future numbers that some analysts are mentioning. The sites not backed by a single billionaire will have to stay lean to stay in business since they seem to be making rather thin margins on loans despite taking no risk. For example, Prosper is not even charging an origination fee on AA loans any more.
March 28th, 2008 at 10:57 am
Lazy Man,
Not to harp on a single throwaway point in this post, but buying groceries online is a very good way to save some money and time. Living in NYC, nearly everyone I know does almost all their weekly food shopping via FreshDirect.com (other than fresh vegetables, which can be gotten cheaper and fresher from a local store). Their prices are usually equivalent to, and many times better than, any local grocery store in NYC including many slae prices and coupons. I know, because I actually price compared for a month before signing up for my FreshDirect account. Plus, they deliver to your door and no tips are expected or asked for no matter how large or small the order.
Before FreshDirect, grocery chopping in NYC was a MAJOR hassle, especially since no one we know owns, or ever wants to own, a car because the only thing more expensive than housing in NYC is parking a car!