Innovation of the Year: Online Marketplace LendingMay 25, 2015 Blog INVESTMENTS , Personal Finance
In the American Bank Technology News, it is said that 2014 was a “Gold Rush” year for online marketplace lending. As a result of the industry’s rapid growth and evolution, American Banker (a daily New York trade newspaper and website covering the financial services industry) has named marketplace lending its Innovation of the Year.
Until recently, “peer-to-peer lending” was the preferred term for the business activity of companies like Lending Club and Prosper.
Then, after individual investors in the loans began to be elbowed out by hedge funds and other institutional investors, the industry rebranded under the “marketplace lending” name. “Marketplace lending” best describes the many fast-growing firms using technology to build online platforms that stand between borrowers and lenders.
A recent report by a California venture capital firm predicted that marketplace lenders will originate $1 trillion of loans annually by 2025. That’d be more than a 100-fold increase from the estimated $8.8 billion in marketplace loans made last year.
“For the first time in banking, the online marketplace makes it possible for a third party to match idle supply and demand,” argues the report, written by Foundation Capital, which has investments in both Lending Club and OnDeck. “As a result, lenders and borrowers can now find one another and agree to terms — all without the involvement of retail banks or credit card companies.”
One of the industry’s high-profile backers, the former Citi chief Pandit, acknowledges that marketplace lending faces big tests ahead. “These platforms will have a role to play,” says Pandit, before adding: “As to how big or small will depend on the kind of trust they develop over time, through cycles and stresses and strains, and through learning.”
In other words, it’s probably too early to say how many stacks of yellow metal are up for grabs.
Article written by Kevin Wack, Colin Wilhelm and John Adams with contributions by Matt Scully.