The worlds of technology and finance are increasingly intersecting in exciting ways. One of the most visible and important trends in recent years has been peer-to-peer (P2P) or marketplace lending.
In this process, a third-party platform matches lenders and borrowers, creating new opportunities in an area long the domain of banks and other traditional financial institutions.
Publicly traded Lending Club and privately-held Prosper are perhaps the most popular and well-known P2P lending services. Their online marketplaces function as intermediaries for loans to consumers and businesses. They offer investors an opportunity to finance the loans, which are usually in the range of $2,000 to $35,000.
The dollar amount of marketplace loans has more than doubled each year since 2010. It reached about $12 billion in 2014 and exceeded $16 billion for the first six months of 2015.
This rapid growth has been fueled partly by the development of more efficient platform technologies, the ability to make more secure transactions, the potential for more competitive returns and the expansion of virtual communities. Combined, these factors are helping P2P lending become a disruptive force in the financial services sector.
Marketplace lending does share a few similarities with traditional lending — like banks, P2P platforms want to make a profit — but other aspects are either unique or underused by banks:
- Lenders and borrowers don’t need to have a common bond or a prior relationship
- The P2P company serves as an intermediary, not a lending institution
- Transactions take place online, not in an office
- Lenders may choose which borrowers to invest in
- The loans are unsecured
- P2P loans can be converted into securities and sold to other lenders
No government regulation
One critical issue for investors is that marketplace lending platforms and their service providers aren’t regulated by the government or insured by government agencies such as the FDIC. Lenders, borrowers and investors should take this into serious consideration before choosing to become involved in P2P lending.
As of now, there are no liquid secondary trading markets for P2P loans; they remain largely hold-to-maturity investments. Furthermore, the securitization of marketplace lending is a field still in its infancy, but we expect it to play a critical role in the sector’s growth. It will provide much-needed transparency and liquidity to investors seeking potentially greater returns than they might derive from comparable high-yield and/or asset-backed securities.
Potential investor risks
In the mean time, a number of questions present themselves to potential investors in marketplace lending.
Given the lack of regulatory oversight:
- How can the true value of a loan or a portfolio of loans be determined?
- How can investors gain much-needed transparency?
- How can they learn what they need to about the collateral related to a portfolio?
This is where our Pricing Service comes in.
We recently announced a collaboration with MountainView IPS to offer investors in U.S.-based marketplace lending platforms the ability to access a new evaluated-pricing service that will help them answer those questions, and many more. MountainView offers a diverse set of critical risk-management and advisory services to a broad group of institutional participants in the financial services industry, making the company an ideal partner for us.
Our Pricing Service covers more than 2.5 million fixed income securities, derivatives and bank loans and is used by thousands of firms around the world. This new pricing capability in conjunction with MountainView will help us provide clients with information about platform risks, credit-risk underwriting, valuation transparency and other areas of crucial importance for investors in the P2P space.
This unique offering leverages our immense data resources and strengthens our suite of management tools, providing investors interested in marketplace lending the ability to enter into any transaction with greater confidence.