P2P Lending in the USA Turns Ten Years Old

Our 10-year anniversary as an industry in this country passed by unnoticed last week. It was on February 5, 2006 that peer-to-peer lending began here when Prosper launched their website. Here is an article that covered this seminal event in the history of our industry.

The Prosper of 2006 looked very, very different to the Prosper of 2016. Back then it was very much a social lending kind of operation. In 2006 borrowers were encouraged to upload photographs of themselves, create a complete social profile and to interact with the investors. Investors would compete against each other and bid down the interest rates in a reverse auction model. The minimum FICO score for borrowers was 520. The thinking being that even subprime borrowers would pay back their loans knowing it was their peers who were providing the capital. Then the financial crisis happened and that idea went out the window.

In May 2007 Lending Club joined Prosper as the second P2P lender when they launched. Lending Club had a very different approach to the market. They decided to go with a fixed interest rate system where their credit model would set the interest rates for the borrowers, not the other investors. They also didn’t want to go into subprime, they required a minimum FICO score originally of 640 (later that was raised to 660).

I reached out to Aaron Vermut, the CEO of Prosper, to get his thoughts on this major milestone for his company and the industry:

Ten years in, a lot has changed but a lot has also remained the same. Democratizing finance was the original idea – making loans more affordable for borrowers while giving investors a chance to earn a decent return on their money. We are now at scale and have created a profitable a business while creating a positive impact on people’s lives.

No one could have predicted the twists and turns the last ten years have taken. The SEC came in and decided that’s the notes issued by Lending Club and Prosper were in fact securities and should be registered with the SEC. In many ways this decision has dictated the way this industry has evolved more than anything else.

To this day we still only have two companies open to retail investors. The only reason that is the case is because of this decision by the SEC back in 2008. If you look at the United Kingdom now they have dozens of platforms open to retail investors.

Having said that, the innovations pioneered by Prosper and Lending Club have created an entire industry. There are now hundreds of lending platforms that have started in the last 10 years, all of them taking inspiration in some form from the initial work of these two companies.

From humble beginnings Prosper and Lending Club have now facilitated well over $20 billion in loans over the last 10 years. And if you look at all the other hundreds of companies that have sprouted up since then that number probably approaches $50 billion.

When I asked Aaron about the next ten years he had some interesting insights:

We are moving towards everything being done on mobile and at point of sale. We are moving upstream where people will be using a term loan to buy products with a low interest rate rather than buying something with a high rate credit card then doing debt consolidation later. Making a loan will become as easy as swiping a credit card.

It has been a fascinating first ten years for what is now known as marketplace lending. But I have a feeling the next ten years will be even more interesting with more growth, more innovation and more mainstream acceptance.

Happy birthday Prosper and peer to peer lending. Here’s to our second decade.