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The Future of P2P Lending – Dusting Off My Crystal Ball

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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.

crystalball.jpgBefore 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

Last updated on August 1, 2011.

This post deals with: ... and focuses on:

P2P Lending

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29 Responses to “The Future of P2P Lending – Dusting Off My Crystal Ball”

  1. Tyler says:

    Seriously, Lazy Man, I’m getting sick of your P2P lending posts, your affiliation with them, and your sales pitches about them. I know they are an advertiser of yours on here. Your content is getting boring and applies only to people who use these services. Most don’t and that is why you keep on trying to push Lending Club. I’m out as a subscriber. Yes I know it won’t make a difference, but at least you know.

  2. Matt says:

    I guess that you’ve never heard of the supermarket Tesco in the UK. They take over 300,000 orders a week online with a turnover of $1.5 billion in the first half of 2007.

    That’s hardly an insignificant amount of groceries and a much larger business than the P2P lenders.

  3. Saving Freak says:

    Hey Crackheads! Stick to the topic at hand. Matt you are out in left field and Tyler, get a life.

    P2P lending is in its infancy and people talking about it is the only way it will proceed. I think this is a viable business model. There is no love lost for the banks and the endless paper work involved in getting a loan. These kind of market driven models tend to do well over the long term whether it is P2P lending or car insurance.

  4. RateLadder says:

    Lazy asked the question… so I will answer it.

    I buy a lot of my groceries from Safeway.com

  5. Wiseclerk says:

    I think peer to peer lending is a most interesting concept. Prosper and LendingClub have yet to prover that it is a long time sustainable business model, but at least for Lending Club the chances are looking good so far.

    I would expect that the market will be divided with more and more players over the next months and years (I will do a blog post about one new entrant next monday).

    You did not mention sites like Kiva and MyC4. Their growth rate and potential is enormous. While not directly competitors to Lending Club and Prosper their model might outpace them eventually.


  6. Patrick says:

    Just wanted to note that I love buying my groceries online and getting them delivered. It saves a lot of time and I get dry ice to play with.

  7. Lazy Man says:

    Tyler, I’m sorry to see you go. It does matter to me that you unsubscribing. You (or someone calling themselves Tyler) have been commenting on my site for some time.

    I admit that it may sound a bit like a sales pitch for P2P lending, but if you look at the history of this blog, I write a lot less about P2P than I used to. Nearly two years ago (May 26th), I wrote “This site is quickly becoming the ‘can I get paid fairly’ and the ‘Prosper.com’ blog. I didn’t intend for it to be this way, but those are the dominate financial focuses in my life right now.”

    I’ve actually made a change to not write about P2P Lending as often. In the last 20 days, I’ve had one other article with P2P Lending in it and it’s more about hacking your credit score than lending money.

    I still believe that it’s the most interesting development in personal finance today. I strive to write about things that you can’t read elsewhere. It seems to me that everything that can be written about Roth IRAs has been written – I don’t know where I “add value” to that topic.

    On a lighter subject, I’ve heard of Tesco in the UK, but I was unaware that they do business online. Let’s not compare them to P2P Lending markets though, P2P lending is an entirely new concept started essentially 2 years ago. Buying groceries has been around forever and doing it online has been possible for 10 years. I imagine that it might be more successful in the UK – while I’ve never been there, I’ve heard that the cities are more densely populated. Dense population makes delivery more viable in my opinion.

  8. Lazy Man says:

    Wiseclerk, thanks for dropping by. I purposely didn’t mention Kiva since it’s closer to a charitable donation rather than an investment like the Prosper, LC, and Zopa. I was not aware of MyC4, but it seems to fit in the same place. I also didn’t cover P2P lending in other countries other than the US.

    I probably missed of “the others” which is why I just grouped them together. It seems new companies popping up every day and I can’t follow them until they get some traction.

  9. escapee says:

    I don’t know, I think with the economy the way it is you are taking a huge risk lending to anyone right now.

    I won’t lend. If I want to help someone out, I’ll just give them the money:

  10. Tyler says:

    Thanks for taking the time to respond in a nice manner Lazy Man. And thanks for the acknowledge of knowing that I have been here a long time. In any case, I understand that your P2P lending is the most dominant thing in your financial life. I guess it’s not mine and that is why I ranted a bit. I do like the material you offer and I know what you mean about the redundancy of ROTH IRA posts, etc. Finding new material can be a challenge. I also keep forgetting it’s a personal blog. You write what you like and what’s affecting YOU, not what I want. I’ll just have to take the good with the bad I guess :-)

  11. If the P2P lending sites are there to stay I see them either:

    1) bought by major banks
    2) threatened by other P2P sites that might emerge with strong backing from financial institutions

    I would like to see a P2P lending site maybe for mortgages. I don’t recall a loan on either prosper or lending club for more than $25k..

  12. Lazy Man says:

    Tyler, I’m no longer sure that the P2P Lending is most dominant thing in my financial life. At the time, two years ago, it was. I’ve written in the past that I’ve stopped contributing new money to Prosper simply because I believe it should be a small amount of a well-diversified portfolio. I personally would keep it under 10% and probably aim to keep it closer to 5% of my assets.

    If I were to write about the most dominant thing in my financial life, it would likely be our (or, more appropriately, my wife’s) affiliation with the military. Expect a few articles of this nature in the future, though it will again be a niche-type post. I imagine that many people will pass over them as not applicable to them.

  13. Lazy Man says:

    Dividend Growth, the concept of mortgage loans was brought up at the Prosper conference. I don’t know if Prosper will be going in this area. It has a few other challenges such as it being a secured loan. Also, I think there are some states that regulate the size of a loan, so there may be some regulatory difficulties in offering more than 25K.

  14. It sounds like the p2p lenders are trying to reinvent the “thrift institution” (i.e., savings and loans, credit unions, etc.) And maybe the thrift needs reinvention… ideally there should be some sort of regulation of these loans, and it would also be nice to have some sort of framework for administering and aggregating the loans. But, maybe those old institutional frameworks have been hopelessly corrupted by decades of greed and incompetence.

  15. KS says:

    The problem is that your money is tied in for 3 years on any loan you make. I think this model will only be successful if they are able to create a seconday market to buy and sell loans. If I make 15% on a loan but need my money out right now and can sell it for an 8% return now thats a liquid market and a very successful model for everybody.

  16. Lazy Man says:

    Prosper is well on it’s way to making a secondary market. There are regulatory hurdles to clear with that though.

  17. NW Agility says:

    actually a lot of people buy pet supplies online.

  18. WealthBoy says:

    I think five years from now, we’ll (hopefully) start to see secondary markets emerging, which will provide needed liquidity for investors. I think since Prosper loans are only a 3-year term, liquidity isn’t so much of an issue. However, for a site such as Fynanz where you are dealing with 10-20 year student loans plus deferment, liquidity becomes a much bigger issue.

  19. Lazy Man :-),

    Thanks for you follow up comment. I do think that certain loans could be outsourced to P2P lenders from the “brick and mortars” financial institutions , which would bring huge cost savings(and a ton of $$) to everyone involved in the process.

  20. Super Saver says:

    Lazy Man,

    Currently, I think P2P is great for the loan administrators such as Prosper. They make a fee, and put no money at risk. However, I think the risk is high for lenders, especially if default rates increase during this recession. Thus, I predict P2P lending will be smaller vs. bigger in 5 years.

  21. GeekMan says:

    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!

  22. 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.

  23. kw1954 says:

    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.

  24. 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.

  25. Four Pillars says:

    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.


  26. 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.

  27. Tom says:

    Who would guess that 6 months after you wrote this Zopa would fail. Crazy.

  28. Lazy Man says:

    I’m not really surprised since I wasn’t getting any help with my loans and that seemed to be their biggest selling point.

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