6 predictions for Peer Lending in 2016
The Peer Lending industry is set to celebrate its decennial anniversary in the US in 2016 (the first loan was issued in February, 2006).
The past decade has seen a whirlwind of disruption in the finance industry, and this change is speeding up. We have come up with 6 predictions for likely events and milestones for the Peer Lending industry in 2016:
Total Origination for Peer Lending in the US will surpass \$50B
Rationale: \$50 billion in total US loan originations is not very far away if Lending Club can sustain their impressive growth rate. However, as Lending Club becomes larger, one might expect the company’s growth to slightly slow down. For instance, Lending Club has ‘only’ grown by an average of about 17% per quarter last year, versus 20% previously. However, I predict that smaller marketplaces and new entrants will enjoy such fantastic growth in 2016 that $50 billion in total originations will not only be reached, but will be exceeded.
Regulators will take a Clearer Stand towards Peer Lending
Rationale: Regulators started taking a close look at peer lending in 2015, including a US treasury investigation in July, a house hearing in May, and a California Department of Business Oversight investigation in December. Some of these regulatory bodies may conclude their investigations in 2016. In the United Kingdom, where Peer Lending started, and which is traditionally relatively lax in terms of finance regulations, the Financial Conduct Authority (FCA) is increasingly involved in scrutinizing marketplaces. It is worth noting that far from avoiding such regulations, the UK Peer Lending leaders are encouraging them, and we think the leading US marketplace will do likewise. A more regulated environment, provided the regulation is fair and adequate, shall protect this nascent industry from potential filibusters in the ranks.
At least one Marketplace will be in Serious Legal Trouble
Rationale: Wall-Street greed plus Silicon Valley reality-distortion equals dangers ahead. As more and more origination platforms enter an already crowded peer lending space, each new platform will need to be increasingly bolder to attract money and attention. Due to FOMO (fear of missing out) new entrants may also be ready to cut a few corners. My prediction is that one of the new entrants will incur the wrath of regulators for over-promising, for being too ‘creative’ in following regulatory rules, or for having obviously put makeup on a pig.
If this does happen, a smaller platform may not have the financial fortitude to weather the legal storm that follows, and I predict that there is a better-than-even chance it will sink.
Probability: 85% (Probability of subsequent failure: 55%)
One Marketplace will try to mix Debentures and Equities
Rationale: While investing is traditionally split between loans (bonds) and company shares (stocks), 2016 could see the appearance of a mixed investment product. Peer Lending has already expanded beyond traditional consumer credit, and includes small business and assets-secured loans. Some marketplaces even take the inventory financed by a loan as collateral. In parallel, a few peer equity investment platforms already allow investors to buy shares of startups, a mechanism that should become significantly more popular as the JOBS act will become fully effective in May 2016. My prediction is that some enterprising people will try to mix both, to offer either a) more reliable debentures (if the loan is not paid back, at least you have a share of the company) or b) higher return potential (dividends or profit sharing on top of interest rates).
Borrowing or Lending will be made (also) from a Mobile Device
Rationale: While over 30% of the holiday online purchases were made on mobile this year, and one-third of users access Facebook only from their phone, Peer Lending has been surprisingly absent from small screens. Major marketplaces offer neither mobile apps nor mobile sites. My prediction is that this will change in 2016 as part of an effort to make it easier for borrowers to get money and to attract more individual investors.
Disclaimer: The probability that a robo-advisor for peer lending with a purple logo launches a mobile app in the first half of 2016 is 100%!
One Marketplace will rely on radically new Risk-assessment Methods
Rationale: Peer Lending marketplaces may use state-of-the art software, but the way the platforms assess borrowers’ risk is essentially through a company created 60 years ago (FICO). The process has changed little since, merely tracking and reporting the credit history of consumers. Thanks to our now always-connected world, it is theoretically possible to have a much clearer and up-to-date picture of someone’s creditworthiness. From Amazon purchases to credit card expenses, Facebook posts or Linkedin connections, a trove of personal data is only a few authorizations away. Some borrowers will be willing to let go of their privacy in order to obtain a cheaper interest rate, and I predict that in 2016 an emerging marketplace will use that data to either entirely replace or supplement a traditional credit report.
As the physicist Neils Bohr once said, “Prediction is difficult, especially when dealing with the future.” It is impossible to foresee what specific events will happen, but we can say with certainty that this will be another big year for Peer Lending.
- Alex Neporozhniy
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