Remember the hidden cash craze
this summer? Someone was hiding money all over cities, leaving people
to find it on their own. It got a lot of attention early on and got me
thinking that there is a lot more out there than random $50 bills and
whatnot. As an investor, we look for huge markets that either have
remained hidden or are just starting to be explored. Financial
marketplaces is one of these.
The first efforts in this space were called peer-to-peer
(P2P) lending, and rightly so. It was literally individuals posting
descriptions of things they needed loans for (a new deck, cosmetic
surgery) and other individuals offering to loan them the money for those
things, at various rates. With no banks involved, it was truly
disintermediated lending. There was no underwriting rigor – because
there was no underwriting, period. It was the Wild West, and about half
of those loans failed.
Today, more sophisticated, more professional operations
have grown up, and these lenders are not truly peer-to-peer, because the
money used to fund their loans comes from a diversified set of
investors, not just individuals. They’re not truly disintermediated
either because the best platforms provide some form of intermediation
(like scoring borrower quality). That’s why I’ve taken to calling them
“marketplace lenders.” These new platforms are able to create a
marketplace where lenders and borrowers can find one another and agree
to terms, all without the involvement of retail banks or credit card
companies.
Why does this matter? Because by removing traditional banks
as the middleman, marketplace lenders can use their spread advantage to
offer lower rates to borrowers and better returns to lenders. Borrowers
on marketplace platforms pay closer to 10% interest, a third less than
the average of what is paid to banks or credit card companies. And
instead of receiving 1% interest for keeping their money in a CD, active
lenders on marketplace platforms receive, on average, an 8% return on
their investments.
I believe marketplace lending will increasingly encroach upon – and take market share from – traditional banking. I
believe this will happen across lending (consumer, real estate, SMB,
purchase finance), payments, insurance, equity and beyond.
But the first domino to fall is one that’s already falling, and that’s consumer loans.
Earlier this year my whitepaper on marketplace lending
forecast that the sector has the potential to originate $1T in loans
globally by 2025.
What does that mean? At 5% of originations, marketplace
lending would create $50B in annual revenues and create $75B in consumer
surplus for marketplace lenders and borrowers (money that would
otherwise go to Too Big to Fail Banks). That’s about 0.3% of GDP back to
consumers in the form of better rates and service.
And all this is made possible by the online marketplace –
the same catalyst that fueled the rise of Internet marketplace pioneers
like eBay, and more recent marketplace business models like Uber and
Airbnb. The marketplace lenders who succeed – and who ultimately remake
the banking industry – will be the ones that create robust, two-sided
marketplaces.
Creating those marketplaces won’t be easy, but there are
several companies that are already well on their way. Finding them, too,
hardly takes a scavenger hunt – unlike your bank’s loan officer,
they’re just a click away.
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