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).
Image Credit: Griraffes
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