76 Finance & economics The EconomistDecember 7th 2019
“G
et yourmoney right,” says a giant
billboard in garish, Instagram-
friendly colours in San Francisco’s down-
town. It is part of a campaign by SoFi, a fin-
tech firm, to position itself as a one-stop
shop for alternative finance. Founded in
2011 to cut the cost of student loans by en-
abling alumni to sponsor undergraduates,
last year SoFi spent over $200m courting
shoppers, homebuyers and young parents.
It now collects funding from a wide variety
of investors, including big institutions.
The vision behind peer-to-peer (p2p)
lending—allowing one ordinary person
with spare cash to help another with a de-
cent plan for spending it—was always a ro-
mantic one. Today only a few die-hards like
RateSetter, a decade-old British lender, still
hew to it; the rest, like SoFi, have diversi-
fied. New rules in Britain are the first salvo
in a regulatory effort that will bring greater
scrutiny. The bets p2pfirms have made as
they have grown will make or break them.
Zopa was the first p2plender, in Britain
in 2005, closely followed by Prosper and
LendingClub in America. The industry
took off after the financial crisis of 2008,
when consumers lost confidence in banks
and started to move their lives online. The
idea was that lower costs and less red tape
would enable firms to serve clients whom
banks shunned.
The retail investors who provided fund-
ing could hope for annual returns of 4% or
more. The firms would avoid credit risk
while making money from transaction
fees, and any late fees. Between 2013 and
2015 the stock of p2ploans grew fourfold in
Britain, to £2.6bn ($3.4bn), and ninefold in
the Americas, to $29bn.
But further growth proved elusive. One
reason was the high cost of acquiring cus-
tomers. Platforms do not know how credit-
worthy someone who clicks on a Facebook
or Google ad is, says Scott Sanborn of
LendingClub. “[But] I have to pay for that
click regardless.” At first they allowed in-
vestors to price loans—but gave them lim-
ited information about borrowers with
which to do it. Investors thus asked for
higher interest rates across the board, re-
sulting in adverse selection.
Banks can draw on cheap and plentiful
deposits, whereas platforms had to com-
pete for savings held by retail investors.
That required a lot of hand-holding, says
Neil Rimer of Index Ventures, a venture-
capital firm. So from the mid-2010s p2plenders turned to family offices, and pen-
sion and sovereign-wealth funds. They
started to securitise loans, bundling hun-
dreds of tiny amounts and selling them to-
gether. In 2017 institutional investors
snapped up $13bn worth of securitised p2p
loans. Last year they funded 90% of
Prosper’s new loans, 94% of LendingClub’s
and 64% of those of Funding Circle, a Brit-
ish firm that lends to small businesses.
To cut acquisition costs, many plat-
forms now cross-sell several types of loans.
Zopa, which obtained a banking licence
last December, offers car finance and wed-
ding loans. LendingClub backs small busi-
nesses and refinances credit-card debt.
Some also “white-label” their products,
originating loans for traditional banks
while remaining invisible to the public.
The shift from pure p2p has earned
these firms a new moniker: marketplace
lenders (mpl). Last year they issued $50bn
of loans in America, a tiny but growing
slice of the stock of consumer credit ($4trn
in 2018). pwc, a consultancy, reckons that
figure will hit $1trn by 2030. Large mpls, in-
cluding LendingClub and Funding Circle,
have gone public. Zopa is rumoured to be
planning to follow.
mpls are now well-positioned for rapid
growth, boosters say. Yet that vision is rosy.
Born in an era of lax rules and economic ex-
pansion, the sector has never been truly
tested. That is about to change.The first challenge is new competition.
Fintech startups such as Affirm and After-
pay now provide instalment loans to shop-
pers at checkout. Payment firms such as
PayPal and Square have started lending to
small businesses. Amazon sponsors sellers
on its marketplace; Uber will soon fund its
drivers. Meanwhile banks are snapping up
fintechs and investing in software.
Second is a slowing economy. To make
more money mpls need to issue more
loans. Since they do not take a hit from de-
faults, they have a bias towards accepting
risky borrowers. That bias is worsened by
reliance on institutional investors, who
demand higher returns than retail inves-
tors, says Rhydian Lewis of RateSetter. A
downturn could see defaults spike—and
investors flee. Default rates are already ris-
ing at platforms that make them public.
That is drawing regulatory attention—
the industry’s third challenge. Britain is
getting tougher on disclosure, governance
and wind-down arrangements. From De-
cember 9th firms will be allowed to market
themselves only to sophisticated inves-
tors. Some are preparing by running stress
tests; others by creating “provision funds”
that will make lenders whole if borrowers
default. But rising compliance costs have
pushed some smaller ones out of business.
Further consolidation is due, insiders say.
The winners may emerge stronger. For
now, however, p2pbackers are cautious.
LendingClub, which was valued at $5.4bn
when it listed in 2014, now has a market
capitalisation of just $1.1bn. Funding Cir-
cle, which listed 15 months ago at a valua-
tion of £1.5bn, is worth £346m. SoFi’s
$4.3bn valuation has not budged since its
2017 funding round. “At first platforms
were valued like tech companies,” says Ad-
itya Khurjekar of Medici, a data firm. “But
fintech is harder, much harder.” 7SAN FRANCISCO
Created to democratise credit, p2plenders are now going after big moneyP2P platformsNothing personal
All wrapped up