Is Peer-To-Peer Lending The New Norm?

Does peer-to-peer lending pose a legitimate threat to big banks?

According to a recent piece by Bloomberg, it’s a distinct possibility.

The article takes a look at two P2P lending startups – Prosper and Lending Club – -and how they’re quickly disrupting the lending industry by taking advantages of the current economic environment.

The reason why P2P platforms are growing is simple: they allow cash holders to earn higher return for their capital while making loans cheaper for borrowers by cutting out the intermediary banks. The result? More willing lenders, fewer defaulting borrowers and a system that, at least for Lending Club, resulted in $718 million in loans last year, and is expected to result in $1.5 billion in 2013. It’s average annual returns range from 5.8 percent to 12.4 percent.

“We’re benefiting from the current environment as a better alternative,” said Renaud Laplanche, Lending Club’s founder and CEO. “We have a pretty strong cost advantage. Plus, the banks have been under a lot of pressure to improve their reserves, much of which were depleted during the crisis.”

And while some may worry about default rates coming form alterative solutions, if Lending Club is any indication, they really shouldn’t. The company hasn’t had any investor with 800 notes or more lose any principle since it launched in 2007, and it mitigates risk by turning down around 90 percent of loan applicants.  

Bloomberg cites Prosper as posting similar “nice risk-adjusted returns across its portfolio,” and it’s clear that others agree. The P2P startup just raised $20 million in backing from Sequoia Capital and added former Wells Fargo exec Stephan Vermut as its new CEO.

What could the successes of Lending Club and Prosper mean for big banks? Bloomberg postures that it could do to banking what Amazon did to retailing or Google to newspapers or Apple to music and movies: essentially, it could flip the entire industry on its head.

“The mono-banking culture  … is on its way out,” said Andrew Haldane, Bank of England’s executive director for financial stability. “The banking middlemen may have become surplus links in the chain.”

To read the original Bloomberg story, click here.

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