In New York last night there was a special event put on by Softbank Capital and Citi as part of their new Innovator Series. It featured a panel discussion titled “P2P Finance: Where are We Headed” with Renaud Laplanche, CEO of Lending Club, Ron Suber, the Global Head of Institutional Sales of Prosper, Matt Burton, CEO and Co-founder of Orchard. The panel was moderated by yours truly. It was an enjoyable and lively discussion.
This event was invitation only and therefore not open to the public so I was not allowed to promote it ahead of time but I can share some of the highlights here. The focus of the discussion was on the future of p2p lending but we obviously looked at the current state of the industry as well.
Below are the list of questions and the highlights of some of the responses.
1. What makes p2p lending attractive to borrowers compared to traditional banks?
Most Lend Academy readers know the answer to this question and there were no surprises here. The lower interest rates that borrowers receive is the primary attraction.
2. Given the size of the opportunity, why have we not seen more competitors in consumer p2p lending?
Ron Suber talked about how running a p2p lending company is like marriage and yoga – it is a lot harder than it looks. He said that Prosper has invested $135 million of venture capital money and is only now approaching cash flow breakeven. Burton also echoed those remarks adding that he sees a large variation in skill level of the management teams at the new platforms and that some platforms struggle to get off the ground. Laplanche also emphasized that it is very hard for a new platform to attract investors because of the long track record and trust that has been built up by the major platforms.
3. How much of the market will be dominated by institutions in three years?
I posed this question by arguing it seems that with the current trajectory institutional investors will come to be 95% of the volume within three years. Laplanche rejected that claim. He said their current balance of 1/3 self-directed investors, 1/3 high net worth individuals and family offices, 1/3 institutional is a good balance for them and one they intend to maintain going forward even as far as three years out.
4. What impact do you see leverage playing in the coming years and will it impact certain ends of the risk spectrum more than others?
Laplanche said that they carefully took on leveraged funds and so he doesn’t see it becoming a big part of their business. Suber said that at Prosper they are seeing some institutions that can borrow money very cheaply and then deploy that capital into AA-rated loans that pay 5%. Leverage will be part of the industry but the consensus was that it would not be a large part.
5. Both LC and Prosper started with unsecured personal loans. Why start there and what’s next?
Laplanche talked about his original PowerPoint presentation he created in 2007 that he used in his first fund raising round for Lending Club. Back then the focus was purely on unsecured personal loans because of the opportunity presented by the inefficient credit card model. Since they have become successful there is now the opportunity to focus on new areas such as small business loans. And eventually they want to be in all areas of lending.
6. How long can you sustain triple digit percentage growth in loan volume?
With the huge amount of credit card volume and the relatively tiny volume of p2p lending this industry has a long runway before the growth rate will slow down. And with new areas such as small business lending and other areas of consumer credit there is no end in sight for the strong growth.
7. Institutional investing is nearly 100% automated when it comes to executing orders. Will this asset class eventually move away from a “browse and pick” format to one that’s fully automated?
Laplanche said that the focus at Lending Club is for a great user experience for both borrowers and investors. And for many investors that means an automated investing experience. This is why Lending Club makes their API available so investors can create tools to automate their investing. Suber said that in recent months he is seeing a change with some investors just wanting access to the asset class in a simple way. They don’t want to choose loans, they just want to put a percentage of their assets in consumer credit. For these people automation just makes sense. But he also said that Prosper has instituted “speed bumps” to slow down the high frequency traders and level the playing field for everyone. Burton’s company is enabling these institutional investors to access both platforms in an automated way through the APIs.
8. P2P lending won’t be a mature asset class until there’s a robust secondary market where investors large and small can get instant liquidity on their loans. What are plans here?
Burton responded that building a secondary market is the number one question that he receives from his clients, and it is one of the main areas of focus for Orchard. He sees this as a very important area for the future of p2p lending. Institutional investors need liquidity for whole loans and right now this liquidity does not exist. Suber had an interesting take. He said that some companies wanting to create credit default swaps for the industry have contacted Prosper recently. The idea here is that investors could short p2p lending and more specifically could even short C-grade loans at Prosper while going long on B-grade loans for example. Of course, these discussions are very preliminary and there is nothing close to being implemented here yet. While Laplanche agreed that a secondary market would be a good thing it is not high on Lending Club’s priority list. He said that most of their investors large and small are long term investors and there it not much demand for secondary market liquidity.
9. Do you think an IPO of Lending Club will result in an influx of investor interest that causes an even more competitive lending environment?
Laplanche said that the Lending Club IPO will obviously raise the profile of the industry and that will be a good thing for borrowers and investors alike. Sure it will attract more investors but it will do the same thing for borrowers so there will not be a major change to the way the platform operates now. Suber gave everyone a laugh here when he said that he prays for three things: his wife, his kids and a successful Lending Club IPO.
Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.