Yesterday we looked at the two main players in the peer to peer lending industry, Lending Club and Prosper. Today, we will look at some emerging companies that are looking to join these two as a major player. While it is true that no new p2p lending companies opened their doors to investors in 2010, it looks highly unlikely that will be the case in 2011. Here are five companies that are all looking to make an impact in this industry next year.
YadYap are focusing on a potentially lucrative niche within peer to peer lending. As the name suggests (YadYap is payday spelled backwards) the focus here is on short term lending. With this kind of lending the loan duration is measured in days or weeks, not years. It is targeted at those people who need a small amount of money (typically $1,500 or less) and are willing to pay a fee to get their money quickly. This fee can extrapolate into an annual percentage rate of 1000% or more.
The are two key factors that make a marriage between payday lending and p2p lending a tantalizing idea. The loans will be paid back quickly and the interest rates should be higher than the traditional three and five year loans. Of course, the huge key here will be the credit approval process. According to CEO, Jared Ericksen this is where YadYap will have an advantage. They will not be relying on third party vendors here, they have developed their own proprietary system to assess credit risk among borrowers.
According to research conducted by Stephens Inc., of the $38.5 billion in payday loans processed in 2009, $8.2 billion was conducted online, generating $2 billion in fee income (a nice return on capital). There are currently no companies in the payday lending space that have a p2p solution.
Right now Yadyap is open to borrowers in Utah and Louisiana. It is not open to peer to peer investors yet, but Ericksen says that they hope to launch some time in the next 6-18 months. Right now, they are funding all the borrowers themselves as they work to perfect their lending platform and build a solid borrower base.
Nestled in between the space occupied by Lendfolio and YadYap is Kudols. Even though they are targeting short term loans, CEO and founder, Tom Contreras insists that they are not focusing on payday loans. The loan duration targeted by Kudols are 30 to 90 day duration with amounts of $1,000 or less and the target interest rate is an annualized 200%, far less than the payday loan industry. Kudols are still officially in stealth mode and not yet open to investors but Contreras expects that the beta launch should happen in mid January 2011.
For investors licking their chops at getting part of this 200% annual return you should not get too excited. Contreras estimates that defaults will be a lot higher than Lending Club and Prosper, somewhere in the range of 15-25% he anticipates. So actual returns are expected to be similar to those seen by most p2p investors, in the neighborhood of 8-12%.
According to Contreras investors will initially have to invest in pooled loans but after the beta they will be able to choose between being an active or passive investor. For the active investor, though, it might be challenging to pick through a number of potential loans. Because of the small loan amounts most of them are expected to be funded in less than one day. The lending platform is going to have more social features than the other p2p platforms although Contreras wouldn’t say exactly what these features would be.
One unique feature Kudols will have which should encourage borrowers is a rewards system where borrowers can earn cash rewards for paying their loan back on time. If they earn enough rewards then they will be able to obtain an interest free loan through Kudols.
MicroVentures is all about funding for small businesses. So if you have dreamed of being an angel investor but didn’t have a seven figure net worth here is your chance. This is how it works. Small businesses have to pay to apply for funding and only when they are approved by the MicroVentures team will the business be available to potential investors.
Unlike other p2p lending operations there is no pay back schedule, because this isn’t really a loan, it is an equity investment. In return for your investment you will receive stock in a company which you must hold for a minimum of one year. The draw here is that you might invest in the next Google or Facebook and earn 10 or 20 times your money. But with that possible high return comes high risk. You are investing in small businesses many of which will likely not make it.
As with all p2p investing the key to minimizing risk is diversification. MicroVentures encourages this by limiting investors to amounts of $250 to $5,000 per investment. So, theoretically with a $10,000 investment you could invest in 40 different startup companies. If a company doesn’t get fully funded then your investment will be refunded to you.
Other Interesting Companies
The following two companies show some promise but I wasn’t able to contact a company representative and there is little information about them online. But they are both worth keeping an eye on.
Lendfolio (http://lendfolio.com/) – Lendfolio is looking to compete head to head with Lending Club and Prosper. It was started by a team of former New York bankers and mathematicians and looks to have a similar business model with loans up to $25,000. It looks like they will be based in New York but it is not clear what their competitive advantage will be. Both their Facebook page and Twitter account make it clear they are “coming soon”.
Money360 (http://www.money360.com/) – When I first stumbled across Money360 I have to admit I was surprised. I really didn’t think that the p2p lending concept could be applied to real estate. I was wrong. Money360 is the only company out of the five listed here that is actually doing business and it is also the most unusual. You can only participate if you are in California and the way it works is up to 10 lenders take a fractional ownership in a piece of real estate. But this is not for a 30 year loan, the loan terms range from one to five years. All loans need to be repaid or refinanced within the agreed term.
Competing for Investor Dollars
It is interesting that all five of these companies will be competing in slightly different markets. Lendfolio will likely be competing head to head with Prosper and Lending Club but the other four companies will face less competition for borrowers. Of course, they will all be competing for investor dollars and their success will largely depend on the kind of returns they can offer. Stay posted. When these companies release news about their plans you will read about it here on the Social Lending Network.
In our next installment on the State of P2P Lending in the USA we will be looking at the p2p student loan market.