This month marks ten years since I made my first investment in what was then called peer to peer lending. In July, 2009 I transferred $500 in to LendingClub to give it a try. Little did I know that first small investment would end up changing my life.
I had first read about peer to peer lending back in 2008 and I was immediately intrigued. I discovered Prosper but when I tried to open an account there they were in a quiet period. So I went looking for an alternative platform and found LendingClub. Within a few months I added $10,000 to that initial $500 investment. Then, I became so enamored with the whole idea of peer to peer lending that I was soon rolling over 401(k) accounts for my wife and I, as well as telling all my friends about it.
It was just over a year later that I decided to start blogging about this industry. Back then no one was writing about it and I really believed the industry had so much potential. So, I started the blog that would become Lend Academy back in November, 2010. The more I learned about peer to peer lending the more convinced I became that it had tremendous potential.
In 2013 as the industry was getting ready to take off I started LendIt, along with my fellow co-founders. It was the first ever conference focused on online lending and the one day event sold out. Then came the go-go years of 2014 and 2015 where dozens of new platforms got under way and venture capital was flowing into the space. The industry had its biggest setback in 2016 with the LendingClub crisis but the strong platforms endured and industry moved to focus on profitability.
Now, as I look back on the last 10 years I see so much has changed. The industry is now known as marketplace lending (thanks to Charles Moldow of Foundation Capital) and it has driven a resurgence in consumer lending and small business lending.
Ten Ways Marketplace Lending Has Changed Since 2009
1. Scale
Back in 2009 LendingClub was a tiny operation. They had originated less than $50 million in total loans when I opened my first account (today they originate more than double that number every working day). Prosper was several times larger than LendingClub back then and was considered the leader in the space. But it was still very small, having originated less than $180 million. Prosper now does more loan volume than that every month.
2. The Rise of Institutional Investors
This is probably the biggest change over the past 10 years. We have gone from an industry dominated by retail investors in 2009 to one dominated by institutional investors in 2019. Self-directed individual investors now make up significantly less than 10% of the total volume at LendingClub and Prosper and that percentage continues to fall. This is one of the reasons for the change from P2P lending to marketplace lending.
3. The Rise of Automation
Along with this movement towards institutional investors was the rise of automation. When I first started investing I would browse all the loans and invest one by one. Then I moved to downloading an Excel file of available loans, running a macro, and then investing in a batch. Soon the platforms allowed automated investing and then third party tools like NSR Platform came along that allowed individual investors to completely automate their investment decisions.
4. Changing Return Expectations
When I started investing the average return to investors on LendingClub’s platform was close to 10%. After Prosper came out of their quiet period their average return was well over 10%. Of course, I wanted high returns so I always had this 10% number in mind when I started investing. As investors flocked to the space returns dropped and it is now very difficult to earn double digit returns. You can see how my returns have changed, along with my expectations, over time in my quarterly returns posts.
5. Public Companies
When LendingClub went public in December, 2014 it was a seminal moment for marketplace lending. The largest company in the space completed a successful IPO that valued the company at $8.5 billion. OnDeck Capital went public the very next week in a smaller but also quite successful IPO. Unfortunately, the markets have not been kind to these companies and they are now both worth a fraction of their market value at IPO.
6. Underwriting Challenges
The year 2015 was probably the fastest growth year in the industry’s history. It also was the year where cracks began emerging. I remember talking to hedge fund investors back then who, by December of that year, had decided to pause their investments due to unexpectedly poor performance. Underwriting standards had dropped as the leading companies chased growth. We now know that 2015 and 2016 were the worst years of this past decade when it comes to loan performance.
7. First Crisis
On May 9, 2016 the industry changed forever. LendingClub founder and then CEO was forced to resign amid improper loan sales and potential conflicts of interest. This had a chilling effect on the entire industry that is still being felt today. Every marketplace lending platform was affected by this news and the reputation of the industry took a brutal hit. While LendingClub has recovered somewhat from that day and the industry has survived its first crisis, it remains the darkest day in my ten years of involvement.
8. The Increased Role of Banks
The first banks to invest in marketplace loans was back in 2013 but by 2015 dozens of banks were investing on multiple platforms. While some pulled back after the 2016 crisis many more have entered the space today. Banks see both consumer and small business loans as sectors where they want exposure. Many choose to invest via existing platforms, some are partnering with platforms that provide banking-as-a-service to originate loans, and some have launched their own online platforms. Banks are firmly entrenched in online lending today.
9. The Growth of Securitization
It was a big deal when the industry completed its first securitization back in 2013, a $53 million package of LendingClub loans sold by Eaglewood. Today, there have been more than 150 closed deals worth around $50 billion. SoFi is by far the largest issuer often accounting for more than half the deals in any given quarter. PeerIQ releases an excellent Securitization Tracker every quarter that details every deal in the space. Most, if not all, marketplace lending platforms see securitization as a critical part of their funding mix today.
10. The Emergence of Fintech
Back in 2009 the term fintech didn’t exist. Now, the innovations that have occurred in the lending space are part of a broader narrative. Fintech is the term used to describe not just lending innovation, but also includes digital banking, payments, money transfers and personal finance. I would argue that lending is the largest and most important of all these segments but they all come under the fintech banner today.
Final Thoughts
When you look at the unsecured personal loan space there was a void before the likes of LendingClub and Prosper came along. Now, consumers and small businesses have more choice for financing than ever before and have saved millions of dollars in interest in the process. Applying for a loan online was a novel concept in 2009 whereas today we can apply on our phones and receive approvals instantly. The marketplace lending platforms have been the ones leading the charge here when it comes to lending innovation.
The one disappointment of the last decade is the lack of opportunity for individual investors, particularly non-accredited investors. Back in 2009 I would have thought that by 2019 there would be dozens of choices for investors but the reality is you can count on two hands the totality of opportunity today.
It has been quite the journey, these past 10 years. No one could have predicted how the industry would change. The next 10 years will see the banks become ever more involved with online lending and that is not necessarily a bad thing. Consumers and small businesses will continue to have more choice and platforms will have to keep innovating. But the industry is more mature today than it ever has been and is well positioned to grow as the total market keeps expanding.
