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  • Fiscal Frontiers

A BRIEF HISTORY OF PEER-TO-PEER LENDING

Updated: Dec 7, 2018


In 13 short years the P2P lending industry has gone from the Wild West to a well regulated and finely tuned international machine

INTRODUCTION

Peer-to-peer lending, also known as "social lending" and "P2P lending", is the practice of matching lenders and borrowers directly. This is in contrast to the more typical scenario of a bank or credit union, which accept deposits from savers (paying them a relatively low interest rate) and then turn around and loan those deposited funds out to borrowers (at a relatively high interest rate). (Modern banking is much more complex than this, but this is still the general idea.)


The internet has radically changed the potential of P2P lending. In the modern context, P2P lending is accomplished via web portals, where the intermediary companies connecting lenders and borrowers can operate with much lower overhead, not saddled with the burden of maintaining brick-and-mortar locations, and allowing technology to do a majority of the heavy lifting insofar as connecting the prospective lenders and borrowers.


THE WILD WEST OF P2P LENDING


In the modern Internet Age of P2P lending, the U.K. and U.S. have been the leaders.


The pioneer of Internet P2P lending was Zopa, a U.K. company founded in 2004, which launched its website (www.Zopa.com) in March 2005, operating exclusively for U.K. citizens. Zopa is still operating today, a longevity not necessarily common to the industry.


In the beginning, P2P lending was an unregulated space akin to the old American wild west

Following Zopa’s lead, Prosper Funding LLC was founded in 2005, and launched www.prosper.com in 2006, as the first P2P lending service for U.S. citizens. On the heels of Prosper, Lending Club was founded in 2006 and launched its website (www.lendingclub.com) in 2007 (having initially started as a Facebook application). While Lending Club was second to the party in the U.S., it has become the largest P2P lender in the world ($38 billion loaned as of 2018, compared to Prosper’s $13 billion loaned, which are both well ahead of Zopa’s $2 billion loaned).


Lending Club was also the first P2P lender in this modern age of P2P lending to create a secondary market, where loans could be sold between lenders, to facilitate lenders cashing out early from their investments. This has grown in popularity, with Zopa and Prosper, for example, now offering this same option.


THE SHERIFF BRINGS ORDER TO THE FRONTIER


The growing industry caught the eye of the U.S. Securities and Exchange Commission (SEC), and in November 2008 they issued a cease and desist order to Prosper on the basis that the loans it was overseeing were unregistered securities. Based on the order from the SEC, both Prosper and Lending Club began registering their loans with the SEC.

The SEC showed up on the scene in 2008 and cracked down on P2P lending

With the SEC being a thorn in the side of the industry, administrative costs were likely increased and the industry was likely depressed. However, in 2014 President Obama signed Title III of the Jumpstart Our Business Startups Act (JOBS Act), which provided an exemption for P2P lending based on certain financial thresholds. On May 16, 2016, the SEC put into effect new rules based on the JOBS Act, which put limits on the amount borrowers could borrow and lenders could lend, which, so long as they are abided by, means the loans do not have to be registered.


The U.S. experience has been the global experience, with P2P lending finding gradual acceptance and legal backing. Now P2P lending has attracted hedge funds, sovereign wealth funds and private investment firms of all sizes. Even banks have begun seeing the draw of P2P lending. And on the other side of the coin, the field of borrowers has diversified to include consumer, real estate, commercial and other borrowers.


The U.K. and U.S. have the leading companies in the P2P industry and their numbers have ballooned in recent years. In the U.S., on top of Prosper and Lending Club there are: Upstart, Funding Circle, Circle Back Lending and Peerform. In the U.K., after Zopa there are: Ablrate, Assetz Capital, Funding Secure, Lending Crowd, Lend Invest, Lending Works, Lendy, Relendex.


A NEW WORLD ORDER


While the U.K. and U.S. are generally the leaders in the industry, there is a growing number of P2P lenders across the globe, including: Bondora, Crowd4Cash, Finbee, Grupeer, Iuvo Group, Mintos, Peer Berry, Robocash and TWINO. And, since it is 2018, and bitcoin is an inescapable phenomenon, there are also bitcoin-specific P2P lending platforms like Bit Bond and Bit Lending Club.


Many of the companies in the P2P industry have begun moving away from the traditional (well, as traditional as 13 years ago can be), model of having investors choose a basket of loans they wish to contribute towards, and have begun offering portfolios of loans. What this does is standardize everyone’s loans and spreads the risk of default equally across all involved.


Unfortunately, as of writing this, there is only one Canadian-focused P2P lending platform, though many of those listed above are open to Canadians who are willing to jump through a few hoops. The Canadian P2P lending experience will be discussed in our next post.

 
 

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