B2B, P2P (Peer-to-Peer), B2C lending have been the most sought after financial services for hundreds of years. Some segments, especially P2P is rapidly gaining traction as a credible and vital alternative to large scale banks when it comes to loans and financing. The new breed of P2P lending companies offers affordable lending facilities especially to the SME market. Recent estimates claim that this sector could be a trillion dollar industry within the next decade. In 2013 & 2014, lending companies raised total funding of $567 million which accounts for 24% of the total funding raised by payment companies, as per a new report.
The P2P lending companies are paving the way to reshape the provision of finance. This sector also holds opportunities for alternative and traditional banks to work together and build a financial framework better suited to customers. This new marketplace is evolving rapidly and is also witnessing tie ups between banks and lending companies. This in itself is a huge milestone.
Some prominent players in the P2P lending space include:
The leading online credit marketplace in the U.S, Lending Club has facilitated more than $5 billion in loans and has paid more than $300 million in interest to investors. It allows borrowers to get instant quotes in minutes without impacting the credit score. Investors can open accounts instantly and build portfolios from hundreds and thousands of pre-screened borrowers. The company is growing at an accelerating pace to service the $3.2 trillion in total consumer debt in the U.S. It provides a double-sided marketplace with no presence of any intermediary, which contributes to an estimated cost advantage over large scale banks of about 400 basis points. It offers 35 different credit rating grades and levies interest rates from 8% to 25%.
Zopa is one of the world’s oldest and one of Europe’s largest peer-to-peer lending services. It has helped people lend more than £643 million in P2P loans. More than 57,000 people use this service to lend between £10 and £1 million to credit worthy borrowers. The name of the company, Zopa stands for “zone of possible agreement” as it brings together borrowers looking for low rate loans with savers looking for higher interest on their savings. Zopa has also launched a reserve fund to handle cases of defaults.
This peer-to-peer lending marketplace has more than 2 million members. It surpassed the $2 billion mark in funded loans recently. Of this, $1 billion was funded within this year itself. On Prosper, borrowers usually list loan requests between $2000 and $35,000 and individual investors can invest as little as $25 in the lists they select. The background check of a borrower provides factors like credit scores, ratings and borrowing histories. Investors also consider factors like personal loan description, endorsements from friends and community affiliations for funding considerations. Prospers covers one-third of the entire P2P lending marketplace in the U.S.
This company specializes in student loan refinancing and has surpassed the $1 billion mark in funded loans to more than 13,500 members. Also called “SoFi”, the company utilizes an alumni-funded lending model that connects students and recent graduates with alumni and institutional investors. SoFi is now extending its lending platform to include a new category, home mortgages. With lending rates as low as 10% for loans up to $3 million, SoFi is helping home buyers purchase sooner. On student loans, SoFi has helped achieve savings of $11,783 on average over the lifetime of loan. SoFi’s student members also enjoy entrepreneurship support, career coaching and unemployment protection.
Funding Circle has a solid track record with small business lending. It also has a successful tie up with the bank Santander. The company has lent in excess of £380 million to more than 5,000 businesses. Out of this amount £180 million was lent within the first half of this year. The popularity of its peer-to-peer lending business helped its revenue jump 177% last year. Over 30,000 people in UK have used the website to date. Funding Circle provides a platform where investors can browse for businesses for funding consideration. These businesses are credit assessed and approved for lending by Funding Circle.
The P2P lending marketplace is disrupting the way finance is provided to those who need it. These companies are clearly challenging large scale banks by bringing new paths to financing. Even some big players are looking to enter this space. It is a known fact that Apple had filed a patent application few years ago called “Peer to peer financial transaction devices and methods”. With the launch of Apple Pay this week, we can expect the company to make further announcements on specific P2P lending services. Moreover, as per an article on theInformation.com, Facebook is in talks with Lending Club and Prosper to integrate P2P lending on its social platform. With Facebook already integrating payments through the “Buy” button, this could certainly be a boost to its payments initiatives.
I am going to share with you something that I have been thinking of doing. I have done 3 startups so far but never a technology product startup. My best bet when that time comes would be international (cross-border) peer to peer lending using analytics based on iTunes purchase history (app, in-app, music purchases), social graph and network/device parameters to give credit scores. Imagine a guy from Sweden giving $1000 to a young entrepreneur in Charlotte ☺ without worrying about defaults. In my mind, this is a real opportunity.