What follows is a work of fiction. It paints a picture of a possible future for p2p lending in the year 2020.
It is September 2020. I am in San Francisco to give a speech at the fifth annual conference of the Direct Lending Association (DLA), the industry trade group. The name p2p lending all but disappeared with the founding of the DLA in 2015 as direct lending was considered a more accurate term.
I have just bought the new iHolo2, Apple’s latest holographic phone, at the Apple store using my new Lending Club Visa card. Investors initially baulked at Lending Club providing banking services but the credit card division has proven to be one of Lending Club’s most profitable business units. Even though Lending Club has had a banking license since 2017 they have tried to stay true to their direct lending roots. Investors who choose to invest in Lending Club’s credit card business enjoy some of the highest returns available in direct lending.
In the taxi to my hotel I put on my new Google glasses so I can check the latest news as well as browse the new listings at my five favorite direct lenders. The script running on my wearable computer knows my search filters and only displays the loans that have met my criteria.
I am feeling that I need to expand my direct lending real estate portfolio today so I look at the commercial loan listings on Prosper, Lending Club, Peerform, iDirect and Money360. I invest $100 each in a new hospital being constructed in Las Vegas, an office building in Des Moines, a shopping mall in Seattle and an industrial complex in Raleigh.
All the big names will be at this conference including the new Lending Club CEO Jamie Dimon, who has been recruited after the unexpected retirement of long time CEO Renaud Laplanche. Laplanche had been at the helm since the founding of Lending Club back in 2006 but he felt that with 12,000 employees now and loan volume over $20 billion a month, now was the time for him to move on. Lending Club needs a leader with experience running a complex financial enterprise and the board felt that Dimon was a good fit.
The direct lending community did not greet the appointment of Dimon enthusiastically given that he has such a traditional banking background. But with the huge suite of services offered by Lending Club these days it was thought that to maintain their impressive growth record they needed someone with Dimon’s experience. His stint as Treasury Secretary now over he has said he is excited to be back in the private sector at the world leader in direct lending.
Since Prosper rejected the hostile takeover bid from Wells Fargo last year they have gone from strength to strength. Their stock price is at an all time high and some analysts are predicting they could be the number one direct lender within two years. Their new home mortgage division is now one of the top 10 issuers of mortgages in the country, achieved in just a four-year time span. We all expected that home mortgages would be popular with direct lenders but no one foresaw the millions of investors who would flock to this kind of investment.
Personally, I only have a small portion of my portfolio in home mortgages. Sure the 5% returns are very consistent and with defaults nearly non-existent I can see the appeal but I have always sought double-digit returns. That is why in the real estate portion of my direct lending portfolio I stick mainly with commercial properties.
In my hotel room I go over my speech for the DLA conference that starts tomorrow. I have been honored to be the first speaker in the morning session and with over 1,000 people attending and all 46 DLA member companies represented I want to make sure I have my speech down. The annual DLA conference is the largest event of the year and there is expected to be close to 100,000 people following along online this year.
Ever since the passage of the Direct Lending Enablement Act (DLEA) by Congress in 2017 the floodgates have really opened. With SEC registration on longer a requirement we have gone from just five major players back then to the 46 established companies today and another 100 or so trying to get going. For a while there was a kind of direct lending gold rush as all kinds of financial institutions tried to take advantage of the new legislation and setup their own direct lending divisions. But the investing public was not as quick to put their direct lending dollars to work at Bank of America or Chase as they have been at industry pioneers Lending Club and Prosper.
The talk of this year’s show is rising industry star iDirect. They have been the fastest company ever to make it to $1 billion in total loans (they took just 15 months) much of it due to their innovative new loan guarantee program. No investor has ever lost a dime at iDirect because they set aside a pool of money to repay investors in the event of a default. Even though this has been commonplace in the UK for a decade iDirect is the first U.S. direct lender to offer such a program. It will be interesting to see how this program fares as the loans start to mature.
Confident that my speech is ready I put down my iHolo2. Right away, though, it reminds me that two of the car loans I had made through iDirect Auto Financing have been repaid and my balance has grown to over $1,000. It also informs me of the 2,862 car loans available for investors right now 16 meet my investment criteria. It asks me if I would like to choose or have it invest across all loans. I say my security code and tell it to invest in all loans that meet my criteria.
The next morning I meet Prosper CEO Jim Catlin in the foyer and we chat about what his company is up to these days. As usual he is very excited about where Prosper is at and the fact they are now the fastest growing direct lender in the country. While Prosper’s rivalry with Lending Club continues to this day, Lending Club still maintains the number one position as far as total loan volume goes but Prosper is hot on their heels. Catlin believes Prosper will take over as number one by the end of 2022 when their loan volume is expected to cross $50 billion a month.
The time has come for my speech. My topic, Direct Lending in 2030, is about the tipping point that I believe will happen by that year. I maintain that even though it is not even 20% of the total consumer lending industry now, by 2030 the majority of consumer lending in this country will be done by the direct lenders. Of course, I am preaching to the choir at this conference but the idea is greeted with tremendous excitement. Time will tell if I am right.
Great article! Thanks.
Possible continuation of story……………..
After the speech & the inevitable palm pressing, it was back to the hotel for a quick shower & a change of clothes as I prepare for the night’s gala event hosted by my good friend & US Senate candidate Dan B. & his wife Katie Holmes. Dan has parlayed his long time tireless support of direct lending (& his recent marriage) to what has become a true populist run as independent candidate for Senate.
Rumored to be a long time supporter of direct lending herself, the presence of the former actress is expected to bring out other Hollywood celebrities as well as the local glitterati. Needless to say I’m really looking forward to tonight’s events.
I laughed out loud at this one although I am not sure the Senate is the right move for you. The trouble with running for political office is it requires lots of schmoozing, handshaking and suffering fools gladly – something that I sense may be a challenge for you. Now, if your good looks, charm and considerable charisma can impress Katie Holmes maybe acting should be your gig. I hear she likes actors…
You my be right, but hey 8 years is a long time. As you can already see by my self characterization as a “long time supporter” of direct lending, I’ve already started to reinvent myself. 🙂 One can rewrite history in 8 years.
Just think,…………….apart from listening to his tiresome wife, what was the current occupant of the White House doing 8 years before he took office? Working on his golf swing? Oh no wait, that’s what he’s been doing since he took office.
Thank you for the undeserved compliments. She used to like actors, but that was before the whole Tom Cruise debacle. My guess is that her family will now try to keep her sequestered for the next few years, which will allow me time to plan my move to ensnare her.
BTW, Jamie Dixon is damaged goods. Daffy Duck stands a better chance at being appointed & confirmed as Treasury Secretary than Dixon.
Good stuff, Pete! You speak about p2p lending with a lot of pride. I still haven’t found the right moment to inform my wife of my involvement! I want to make sure there is a medic and a divorce attorney standing by! 🙂
Tim, If you need to convince your wife I recommend you point these articles in mainstream financial publications:
http://www.forbes.com/sites/chrisbarth/2012/06/06/looking-for-10-yields-go-online-for-peer-to-peer-lending/
http://online.wsj.com/article/SB10001424052702304587704577333801201736034.html
Peter, you mentioned your “wearable computer.” You should read the article on the Drudge Report today about the sunglasses with built-in computers. Pretty cool stuff!
Great post, Peter. In the VC world, this type of thinking is the default mindset…agree with you on many aspects here, though my preferential bias might be chiming in! I certainly am on the same page with the directional sense of the industry . . . though admittedly, if we can even think about approaching 20% of the consumer debt market within the decade, this whole spiel will have been a bigger deal than even most of the believers thought at the outset!
–Dan
If we can even approach 2% within a decade…………..it’ll have been due to a monumental shift, to say nothing of 20%.
To reach the 20% we are going to need to go way beyond the one product we have today (such as into cars and home mortgages) and there will have to be many stars align for that to happen. But it is certainly possible….
Ok, just so we’re clear. Are we talking about 20% of total household debt? Within a decade? Yeah, sure it’s possible with an expansion into car loans, mortgages, commercial lending, like Peter said………………..coupled with a virtual collapse of the banking system & subsequent rewriting of most banking regs.
In other words, forget about the alignment of stars. In honor of the Olympics let’s just say that the chances of 20% in the next decade is about as high as USA Women’s Field Hockey winning gold. Massive food poisoning would have to decimate the competition for that to happen. 🙂 So, not a chance in hell.
Great post Peter. Although it’s a pretty crazy idea to see 20% of the debt market, it’s still exciting to be part of a new industry at (close to) the ground floor. Reading this post and a few othes of yours has me itching to put another $10K into my P2P loans.
I’m curious if you don’t mind me asking, as a preacher of P2P, what percentage of your overall investment portfolio do you have in P2P?
Thanks for your kind words. I have just under 10% of my investment portfolio in p2p lending spread between Lending Club and Prosper.
Peter, are there any p2p sites that focus on mortgages of any type? Such as low risk construction or something along those lines?
There are very limited options when it comes to p2p lending for real estate. The only option I know of is Money360: http://money360.com/ and they have pretty high minimums. There is a new company about to launch which could be interesting called Privlo. You can sign up for their private beta here: http://www.privlo.com/.