Early last month, most of the world’s primary experts in the field of online lending descended on San Francisco for the 2nd Annual LendIt conference to discuss all things peer-to-peer and online lending. A rapidly growing segment, P2P lending appears to have the potential to fundamentally shift the way personal and small-business lending happens.
Peter Renton, founder of Lend Academy and co-founder of the LendIt Conference, is one of the premier experts/educators in the P2P lending sphere. He spoke with Equities.com about what he learned at the conference and what everyone should know about P2P lending.
EQ: So the 2014 LendIt Conference, sponsored by Lending Club©, was held from May 4-6 this year in San Francisco. What did you learn there that the general public should really know and doesn’t at this point?
Peter Renton: One of the first things is that peer-to-peer lending is going to be very much about partnering with the banks going forward. A lot of people think that peer-to-peering lending as completely bypassing the banking system, but, when you think about it, the banks provide a valuable service. They’re just inefficient.
Renaud Laplanche, CEO of Lending Club, in his opening keynote at LendIt talked about their new partnership with Union Bank. Union Bank is one of the top 25 banks in the country and they are going to be working together to create new products. That’s going to be a very close, symbiotic relationship where Union Bank is going to be able to offer their customers Lending Club products and possibly vice versa.
Banks have been involved in lending for centuries, they’re going to want a place at the table here, and I think they will continue to be important. What I believe is going to happen is what was discussed in the Barclays (BCS) conversation at LendIt. Some of these banks are going to move more and more of their loan operations to these online platforms. Particularly when it comes to smaller loans. The Barclays guy even said that he expects in 10 years’ time, that Barclays could be a smaller bank than they are today, which speaks volumes to the disruption taking place today.
Another major theme of LendIt was the collaboration in this industry, how we’re still getting started and the biggest hurdle we have to overcome is the fact that people are still unaware of this industry. As Ron Suber, president of Prosper, said it is so important to build education, awareness and understanding. We’re still a small industry. For the most part, the general public doesn’t know about this industry and that is what we all need to focus on.
EQ: So what about securitization? Can we anticipate that being a part of the segment moving forward?
Renton: The first securitization took place less than 12 months ago in this industry with the Eaglewood Capital deal. Since then several more deals have closed including the OnDeck Capital deal announced on the eve of the LendIt. But when asked, industry leaders said that securitization is going to have a role going forward but it is not going to be the predominant driver of growth. And there’s not going to be the crazy derivatives and synthetic products that you’ve seen in other industries.
EQ: It sounds like a busy conference!
Renton: There’s plenty more I could tell you! We had some representation from the federal government. They are really becoming more and more aware of online lending, particularly when it comes to the small business side. There’s a whole bunch of free data at finance.data.gov that they will make available for anyone to use.
Underwriting was another important topic covered in depth at LendIt. There is a lot of data out there. The good platforms are using both traditional data and alternative data. By combining both, platforms can create better underwriting models and reduce defaults. Big data or alternative data is very popular these days, but data should only be used if it is truly predictive of financial behavior.
And finally, Charles Moldow of Foundation Capital gave a great presentation where he discussed his new white paper about peer-to-peer lending. He had created a new term for peer-to-peer lending called “marketplace lending.” He predicts that marketplace lending by 2025, so within 10 and a half years, will be a $1 trillion dollar industry globally. That was a big, bold statement that drew a lot attention as well.
EQ: How do people currently in the industry see the penetration of peer-to-peer lending in the general public happening? How quickly does it seem to be happening? Moldow’s estimate of $1 trillion a year in 10 years sounds pretty big.
Renton: The industry has been growing at more than 100 percent a year, and, from the talk at the conference, that growth rate is not slowing down. They feel like it’s going to more than double annually for a while.
This year, if you look at all the online lending and marketplace lending platforms, you’re going to be just south of $10 billion. So $1 trillion would be 100 times where we are today. But if you keep doubling it each year, it’s not going to take long. Two to the power of ten is 1,000. So if you double every year, Charles Moldow will actually be off by a factor of 10.
Clearly it’s not going to double every year forever; that’s simply impossible. But the sense is it’s going to double every year for at least the next two or three years before it slows down.
EQ: Are people talking about this going across borders and becoming a global phenomenon?
Renton: That was a major theme. One morning, we had an international session where we had a European panel and a China panel. That’s two of the major places outside of the U.S. where P2P lending is really taking hold. So, yes, there was a sense that it’s going to be a global industry. In fact, we had attendees from 23 different countries. People are coming to network from all over the world and they want to know what’s going on, so it’s going to be a global phenomenon.
There’s one company that is worth mentioning called Lendico. They are a German company, and they want to create the first global brand in this industry. They’re aggressive and they’ve got some deep-pocketed backers. They’re already in Germany, South Africa, and Spain and they’re planning on adding a new country every month or two for the foreseeable future. They are positioning themselves to be the first major global player in the industry.
But Renaud Laplanche, who is both a French and US citizen, was asked directly at the conference what their international ambitions were and he said America is the complete focus right now. There’s still room for a tremendous amount of growth possible here. Lending Club is not interested, necessarily, in being that global brand, at least not right now.
Certain countries are going to be easier than others. One of the things that China is really struggling with is that there isn’t a great credit infrastructure there. Here, we have three main credit bureaus that have incredibly detailed information on all of us, and a similar ecosystem doesn’t exist in China. Many other countries are in the same boat, so peer-to-peer lending will have a more difficult time gaining a strong foothold in some places
EQ: It does occur to me that you’ve definitely seen, on the charitable side, a lot of push for micro-loans and serving under-banked communities around the world. Could P2P potentially fill some of that demand in the future with a for-profit model?
Renton: Oh, sure. That’s already starting to happen. Most of us know the great work that Kiva is doing – they have over a million accounts now with people lending money. They were on a panel at LendIt discussing the great work they have been doing. We also had another company by the name of Semble, which is a for-profit company providing finance for non-profits. Who’s the best person to provide a loan to a non-profit? It’s their donation base. So they work in that really innovative area.
There’s even one company that’s doing microfinance in Africa that is going after the African diaspora. There’s Africans living all over the world, investing in their home countries through microfinance. It’s really innovative stuff. I think we will see a blurring of the lines between non-profit microfinance and for-profit peer-to-peer lending.