[Editor’s note: This is a guest post from Gregg Schoenberg, Executive Chairman at Peerform. Peerform is a bronze sponsor and will be in attendance at LendIt USA 2015 on April 13-15. In this post, he talks about the unlikelihood of a winner-take-all scenario in the marketplace lending industry.]
In recent years, several emerging platforms, including Peerform, have joined more established players in the marketplace lending space. We are glad to see that the market has grown so robustly and are optimistic that these next generation marketplaces will help fuel the sector’s next leg of growth. Here are a few reasons why we are bullish:
There is no winner-take-all-effect in personal lending.
In other corners of the Technology world, a dominant player can come to “own” an entire market by creating a virtuous cycle that continually accrues in its favor at the expense of all others. We think that in the case of personal lending, this scenario will not play out. At its core, our sector is part of the Financial Services world. Sure, there are some companies that have or will develop proprietary technologies that offer distinct advantages. However, when it comes to obtaining a consumer loan, the choice to move forward can be a consequential decision. As platforms increasingly focus on their chosen market segment, the probability that just one or two players can build a strong, personalized relationship with the lionshare of our nation’s growing ranks of borrower prospects is highly unlikely. We are seeing more emerging specialized platforms (i.e., small business, student, auto loans, real estate and energy saving) become increasingly adept at meeting the needs of borrowers who have very specific needs. This is great news for borrowers and the marketplace lending industry alike.
Many growth chapters lie ahead.
According to the FDIC, as of Q1, 2014, there were nearly 6800 FDIC-insured banks in the US (by way of comparison, Japan has about 200 domestic banks). To put it mildly, even after the Great Recession and several waves of banking consolidation, there are still lots and lots of traditional banks in this country. Many of these banks have been built on technology platforms that date back several decades. More importantly, the mindset of many of these banks has been slow to change. Even if we put aside the regulatory advantages that our industry enjoys today, the personnel, real estate and infrastructure costs besetting traditional lenders create enormous competitive headwinds for them vs. marketplace platforms devoid of archaic machinery. If we accept Foundation Capital’s estimate that only about 2% of all lending revenue is being captured by marketplace lenders in all verticals, then we think that there’s more than enough “tailwind growth” available for our sector to continue to chip away business from our country’s 6800 banks.
Product specialization will fuel demand.
We don’t know when our benign interest rate environment will change; however, as sure as night follows day, we know that it will happen. When the riskless rate is no longer so low, default rates, competition and use of borrower proceeds may all change in ways that are both expected and unexpected. We anticipate that demand for personal loans will not drop dramatically any time soon, but the features associated with those loans will begin to change—especially if the interest rate environment shifts before a vibrant secondary market for marketplace loans is present. Down the road, we expect to see platforms thrive by carving out differentiated products from each other. Variable rate offerings, shorter maturity loans and many other new loan products will help broaden the base of borrowing customers.
Buyside players will want more platform choice.
Today, the supply of marketplace paper represents a significant bottleneck that is restraining the industry’s growth to some extent. However, as more next generation platforms like Peerform march towards scale, innovations in sourcing borrowers are likely to follow. With an increasing number of platforms offering institutional grade loan product, marketplace lending funds will be able to work with a greater number of platforms. In addition to having more platform choice, funds will be able to assure their LPs that they are not overly dependent on just one or two platforms for assets. More certainty around supply should help in their fundraising efforts, thus bringing added capital into the sector.
We recognize that the marketplace lending industry is no longer in the first inning of its development. Fortunately, the game is still early in our view and the opportunity for quality platforms to participate in a meaningful way remains bright.