Peer-to-peer (P2P) lending firms are increasingly becoming a competitive threat to banks. In August, Lending Club, one of the biggest P2P lending platforms in U.S., filed a registration statement with the Securities and Exchange Commission for an initial public offering (IPO). Company executives are reportedly aiming for a $5 billion valuation, though the numbers may change. Industry peer OnDeck Capital, which specializes in small business loans, plans an IPO for this fall. Another small business P2P lender, Kabbage Inc., indicated it might follow suit in 2015.
Why are these IPOs important? Because they could change how investors and borrowers think about their options in the capital markets. Lending Club’s IPO will be the first in the U.S. for a P2P company and will help raise P2P’s profile as an investment and borrowing tool, luring more potential customers away from traditional lenders.
Researchers with global ratings firm Fitch write, “A successful IPO could act as a catalyst and benchmark for other P2P institutions to pursue IPOs in order to raise capital and/or for investors to monetize their P2P investments. Publicly traded shares could also serve as a currency for acquisitions for industry consolidation or product/geographic expansion purposes.”
P2P lending, also known as crowdfunding, is a relatively new phenomenon. It originated in the U.K. in 2005 and spread to the U.S. in 2006. The industry’s growth, however, has been remarkable. Since its founding, in 2007, Lending Club facilitated a total of $5 billion in loans, more than doubling its origination volume each year. OnDeck facilitated $1 billion in loans since its launch in 2007. Earlier this year, Forbes named both Lending Club and OnDeck to its list of America’s Most Promising Companies.
Realty Mogul’s growth has followed a similar pattern. The value of our investments more than doubled from just over $13.8 million in February 2014, to $30.8 million through the month of August – over 200% growth in just half a year!
P2P platforms are offering greater access to capital for borrowers and higher returns for investors than traditional financial institutions. The Motley Fool, a multimedia financial services site, estimates that investors lending money through P2P platforms earn on average between 5 percent and 9 percent in interest on their loans. Borrowers, on the other hand, are obtaining loans at interest rates that are on average 31 percent lower than those offered by banks.
P2P lending as a whole has been growing at an average of 84 percent per quarter, according to the Federal Reserve Bank of Cleveland. This has been happening at the same time during which banks have cut back on consumer-finance and credit card loans and curtailed their mortgage lending.
Yet because the P2P industry is so young, it hasn’t reached as many people as its potential would warrant. Fewer than 200,000 people in the U.S. have so far borrowed money using P2P lenders, according to venture capital firm Foundation Capital. The industry’s short history has also caused some investors to wonder whether P2P platforms are as safe as banks. The main challenges P2P lenders have faced in competing with banks include light capitalization and lack of prudential regulation, which governs the behavior of deposit-taking institutions, Fitch reports. Once these constraints are lifted, “banks could increasingly feel disruptive pressure from P2P lenders.”
Fitch expects that, to limit this pressure, banks will start partnering with P2P lenders. This is already happening — Union Bank recently formed an alliance with Lending Club to create new credit products for customers of both companies. Realty Mogul’s CEO Jilliene Helman, who has worked for Union Bank and views it as a very conservative institution, called the partnership “the tipping point” for the P2P industry.
The Future of Lending
Lending Club already has significant cash on hand, so it doesn’t need an IPO for funding purposes. For other industry players, however, the possibility of launching IPOs would open up new sources of capital, helping ease concerns of insufficient capitalization. More importantly (and this is the main reason Lending Club is pursuing the IPO, according to CEO Renaud Laplanche) is that going public will raise the company’s profile among potential customers, along with that of its peers. Today, banks serve as the primary source of loans for everything, from credit cards to mortgages, writes Foundation Capital General Partner Charles Moldow. In the future, that role might belong to P2P and crowdfunding platforms, including Lending Club, OnDeck and Realty Mogul, among others.
“To me, Lending Club truly looks like it could be the next Amazon.com of lending,” writes The Motley Fool’s Dan Newman.
By leading more people to recognize P2P as a viable alternative to banks to handle their borrowing and investing needs, the IPOs may fast-track the process of P2P becoming adopted as a mainstream presence in the finance industry.