Peer-to-Peer Lending Grows Up, and Gets Wall Street’s Attention

[Corrected 4/14/15, 11:31 am. See below] Borrowing money, or refinancing borrowed money, is easier now than it’s ever been as new online lenders put credit lines just a few clicks away. And now the traditional titans of Wall Street are jumping on board.

In the last decade, a handful of online lending companies have chipped away at the edges of our debt-centric culture of credit cards and their earlier incarnations, dating back more than a century.

Fundbox, Dealstruck, Lending Club, Prosper Marketplace—which just raised $165 million from investors including Credit Suisse and J.P. Morgan—and many others have made obtaining a new line of credit the kind of easy, self-serve transaction we’ve come to expect. For both personal and business loans, these companies developed methods of investigating a person who is seeking a loan almost instantaneously—through algorithms that analyze myriad factors online to make a decision about creditworthiness—and can connect those borrowers with peers who will finance their loan.

But what began as a niche financial service for consumers who wanted relief from high-cost credit cards and small businesses that couldn’t get a loan from the traditional banking system is now attracting interest from the heart of Wall Street. In other words, the traditional realm of finance now sees money to be made as peer-to-peer lenders grow in popularity and prevalence.

“There’s an enormous opportunity for these (peer-to-peer) financial firms to either take away business from the traditional firms, or to fill a need that is not currently being addressed,” said Mark Palmer, a financial analyst at BTIG Research in New York. “In the case of unsecured consumer lending, which is the primary focus of Lending Club, it’s really about taking business away from those credit card issuers who assign an annual percentage rate of 19 percent or more on cards.”

Large financial institutions are involving themselves with this odd breed of loan business. Dealstruck, which was founded in 2013 as a peer-to-peer lender, is now funding most of its loans with its own borrowings or through institutional investors—big companies such as asset managers and hedge funds who pool and invest money on behalf of corporations and rich folks.

BlackRock, one of the largest of those institutional investors, holds a stake in Prosper Marketplace, one of the oldest peer-to-peer lenders. Prosper made headlines last week when it landed $165 million in a Series D round from a list of investors that include the asset management arms of some of the largest banks: Credit Suisse NEXT Investors, J.P. Morgan Asset Management, SunTrust Banks, BBVA Ventures, and Neuberger Berman Private Equity Funds, among others. [This paragraph was corrected to reflect SunTrust’s ownership. It is not connected to USAA.]

Prosper, OnDeck and Lending Club (NYSE: LC) are the oldest among the lenders, founded in 2005, 2006, and 2007 respectively. All three companies ran through numerous hurdles on in the ensuing years as they sought to establish a place in the market for direct-to-consumer loans, including the financial crisis in 2008. OnDeck (NYSE: ONDK) and Lending Club emerged with the most prominence, after both filed for public offerings last year, though Prosper is catching up.

The lending has stretched into subsectors like mortgages and automobiles, with the rise of companies such as LendingHome and DriverUp. LendingHome has received a $70 million Series C investment from Chinese social-networking company Renren.

While peer-to-peer lending is viewed as a threat to billions of dollars of bank profits, Prosper’s funding round shows that there is no need for an adversarial relationship between traditional banks and the new lenders, Palmer said, adding that there are several avenues for cooperation.

That’s the way BlackRock seems to see it. In February, it purchased about $330 million of the consumer loans that Prosper had made since November 2013, with plans to slice that debt up into tranches and sell it off to other investors—called securitization—while retaining a piece itself, according to a Bloomberg Business report.

Peer-to-peer lenders offer individuals and small businesses a network of investors, typically their wealthy peers or accredited investors, who are willing to collaborate to fund a loan. Instead of receiving a prize or product, like one might in a crowd-funding campaign on Kickstarter, investors expect an interest-based return. Most of the times the individual investors don’t directly own they loans, … Next Page »

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David Holley is Xconomy's national correspondent based in Austin, TX. You can reach him at dholley@xconomy.com Follow @xconholley

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