Peer-to-peer lending upstarts begin to look like old banks

P2P lending. Credit:Flickr/401(K) 2012

A chill wind is blowing through the peer-to-peer lending industry in the wake of the abrupt departure of LendingClub’s CEO and several managers.

Details of what prompted their exit are still murky. But the company’s disclosure of sale abuses and potential conflicts of interest show even the biggest and most transparent platforms can slip up.

With regulators now stepping in to untangle the mess, these upstarts who use the internet to match borrowers with people willing to finance them may start to look a lot more like regular lenders. And that may only help traditional banks.

Peer-to-peer platforms have already been co-opted to a large extent by the financial industry, with banks investing in them directly, striking partnerships, and buying up loans and packaging them up for investors.

Banks and investment firms funded 32 percent of the $1.3 billion of peer-to-peer loans issued in the U.K. last year, according to a report by Cambridge University and Nesta, with the figure closer to 55 percent at LendingClub in the first quarter.

Britain’s biggest banks are all expected to have their own marketplace platforms in the next three years, according to a KPMG survey last year. JPMorgan is collaborating with LendingClub rival On Deck for small-business lending, while Wells Fargo is also opening its own a fast-track small-business loan platform. Peer-to-peer is already starting to look a lot like peer-to-bank.

That relationship is unlikely to break apart (even if Jefferies and Goldman Sachs are holding off, at least temporarily, snapping up LendingClub loans).

Faced with the prospect of a wider industry crackdown, peer-to-peer platforms will have to take some old-fashioned medicine and look even more like the industry they were designed to disrupt.

If regulators decide peer-to-peer lenders need to bolster capital or their compliance procedures, what makes these loan match-makers so different from banks — a nimble, automated cost base and freedom from regulators’ most onerous capital requirements — may fade over time. And that may make them more palatable partners for banks in the long run, even if it hurts their runaway growth rates.

The risks of using and investing in an automated online finance platform have been clear for a while, even before LendingClub’s woes. These platforms lack “skin in the game” in that, because they don’t bear the risk that the borrower may default, they may make poor lending decisions, according to Cormac Leech, a fintech analyst at Liberum.

Earlier this year, Moody’s warned of a faster-than-expected build-up of delinquencies on securitized U.S. peer-to-peer debt. And Chinese authorities’ arrest of executives at online platform Ezubo over an alleged $7.6 billion fraud makes LendingClub’s issues look like a picnic.

Regulators aren’t sitting still: They have issued guidelines and rules to protect consumers and set minimum standard for governance and risk management.

But LendingClub’s disclosure suggests some platforms still might be too nimble for their own good. The company has grown staff at a pretty rapid pace, swelling from 976 employees and contractors to 1,545 in the space of one year. Rival OnDeck has more than 600 employees, while Zopa has 175 staff in London. Are these numbers big enough to keep operational risk under control? That’s a question regulators will want to know the answer to. More staff and, potentially, capital may be the outcome.

Right now, this is not a systemic financial issue. Total peer-to-peer lending in the U.S. in 2014 was about the size of a quarter’s profit at JPMorgan. But this is a market that could eventually hit $290 billion worldwide by 2020, according to Morgan Stanley.

The combination of a turning credit cycle, an investor re-pricing of risk and more regulatory scrutiny make it likely that change is on the way — and that the cultural and regulatory gap between fintech and traditional banks will narrow. And so, too, will the upstarts’ competitive advantage over the incumbent.

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Bloomberg

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.