There was an interesting article in the American Bankers Association (ABA) Banking Journal recently discussing p2p lending. I was very curious to see what the bankers take on the industry is now.
While it looks like banks are paying attention they see no threat whatsoever to their business from p2p lending judging by this quote:
The emergence of P2P lenders like Prosper, Lending Club, and Zopa was once thought of as a disruptive force in the financial services industry. However, although Lending Club’s loan volume has been steadily increasing month-over-month for the past year, the $20 million in loan volume it did in June 2011 is a drop in the ocean of overall consumer lending.
I completely agree with that statement – p2p lending has less than 0.1% of the consumer lending market in this country so banks need not worry for now. But if I were a banking executive I would be keeping a close eye on this industry. Why? Because it is growing at around 100% a year and if it maintains that growth rate it will become a large industry in a relatively short time.
The article goes on to validate the concept of p2p lending by encouraging banks to create their own p2p lending platform:
Not only is this not much of a threat to banks’ traditional lending business, there’s really no reason why banking couldn’t create an online lending marketplace of its own. In addition to the organic traffic that lenders could drive to such a site, they could refer to it those loans they decide to pass on themselves. They’d give the option of funding them to those investors and savers looking for higher rates of return than they’d obtain with CDs, by lending money in the marketplace. Banks could easily underprice Lending Club’s processing fee (which ranges from 2.25% to 4.5% of the loan amount), and avoid charging the 1% service charge for each payment received that Lending Club hits investors with.
I have no doubt that banks could undercut Lending Club and Prosper as far as fees go. Not only that but many banks have excellent risk management models when it comes to the kinds of borrowers who use p2p lending. So I imagine it would be a shorter learning curve for them than it has been for Lending Club and Prosper. If a Bank of America or Wells Fargo launched a p2p lending site I think it would be a great thing for the industry. Those investors who have been holding back because p2p lending seemed inherently risky may feel more comfortable with a TBTF bank running the show. I think this would be a tide that would lift all boats and Lending Club and Prosper would benefit as well.
But of course, that is probably not going to happen any time soon. My guess is that banks will continue to ignore p2p lending while they see no impact from it on their bottom line. In reality they probably have five years or so before p2p lending will be large enough to make much of a dent in the massive consumer lending market. In the meantime p2p lending will grow steadily, somewhat under the radar, providing both borrowers and investors with a better deal than they can get at the banks.
When p2p lending is far bigger then the most likely scenario will be for a bank to just go ahead and buy a leading company rather than reinvent the wheel themselves. I can foresee a time before the end of the decade when banks will open their checkbooks and try to snap up any p2p lender they can get their hands on. Hopefully by then we will have many established companies for them to choose from.
Hat tip to Walter for bringing this article to my attention.