Lending Club’s IPO was massively successful. Up 56% on the first day of trading. $1B of additional cash raised. Largest IPO out of Silicon Valley in 2014. Higher market valuation than all but 14 banks in the U.S.
That it was the first “peer-to-peer” lending company to go public made it that much more meaningful. Finance is not just being disrupted, but finance’s disruptors are now becoming mainstream. That is a big deal.
So how did we get here, and why does it matter?
How did we get here?
The Financial Crisis of 2008/2009 has a lot to do with this. Many of the county’s top banks have paid fines for unbecoming activities associated with the crisis. Since 2009, those fines have totaled $184 billion … over 117 legal cases. And here’s the kicker, there are 174 cases still outstanding, in the process of being resolved, so we might not have even seen the half of it yet.
The big fines already paid, and the looming uncertainty of the cases yet to be resolved, have kept banks at bay. They’re focused on regulators more than consumers. One senior executive at a top U.S bank told me that he now spends 75% of his time dealing with regulation, while two years ago, that number was just 10% (in the same role).
Banks are underserving their customers on product and price and service. In many cases, banks simply skip over whole swaths of the consumer market. Small business lending, mortgage lending, and student lending are good examples. Talk to a small business owner who is making less than $10 million a year and finds it difficult to find a bank who will lend money, even though the business is strong. Or a 33-year-old law grad who’s making enough to pay a mortgage but finding it difficult to find a bank that will approve a mortgage. Or a 27-year-old “corporateer” who’s getting an MBA but finding it difficult to get a good rate from a traditional lender. Banks have left a gaping hole in finance.
And peer to peer or “marketplace lending” has been filling that void for the last few years, and now increasingly so: $10 billion -$15 billion in loans as of today and as much as $1 trillion by 2025. And by some estimates, this number will be even higher. For comparison, today’s entire consumer debt market is under $12 trillion. And the largest such market in the world.
That’s an incredible amount of disruption, in a relatively short period of time, of an industry long thought to be un-disruptable because of the high barriers to entry, particularly because of heavy regulation and strong capital intensity.
Why does it matter?
- They’re serving consumers that are currently either not served or ill served by traditional finance.
- They’re providing a better priced product.
- They’re providing a better customer experience, one that’s simple and clear and quick (and, in many cases, completely online).
There’s more to the story, too: Consumers in unprecedented numbers are open to doing their “banking” with marketplace lenders, especially Millennials. My favorite stat, from the Millennial Disruption Index, is that 71% of Millennials would rather see their dentist than deal with a bank. More recently, at this year’s Money 2020 conference, Susan Herbst-Murphy from the Federal Reserve put it this way: “Millennials … are open and want to do business with alternative financial services platforms, more so than any other generation.”
While the disruptors are maturing, we are still early in this journey of transforming finance. According to my friend and industry colleague, Matt Burton, who’s CEO of Orchard Platform, there are about 100 marketplace lenders in the U.S. right now, and that number is growing at an accelerated pace. Only about 10-15 marketplace lenders have surpassed the $100M loans funded milestone. My company, a student loan-focused marketplace lender I co-founded over two years ago, is one of them. We expect to grow by a factor of four in 2015 and expand the set of products we offer to our growing base of borrowers. It’s an exciting time to be a marketplace lender because of the promise it represents to consumers.
We also understand that the most important thing we can do in these early days, as a company, and for the industry, is to grow fast, but also responsibly. We believe this understanding is shared among the industry leaders in marketplace lending. Because our loan offerings have surpassed consumer expectations relative to traditional lenders so far, we’ve all been able to grow, fast and responsibly.
Our success as an industry is tied to whether we can continue serving consumers better than traditional finance companies. Banks remain retrenched and marketplace lenders have a lot of wind in their sails at the moment – conditions that make for a strengthening market. I would not be surprised if we see more marketplace lending platforms go public and the marketplace lending ecosystem continue to mature. Just a week after the first marketplace lending IPO (Lending Club), the industry saw it’s second. OnDeck Capital opened at $20 per share in its first day of trading and closed over $27, securing investors a 40% gain.
The promise of marketplace lending has been made. The only question is “Can it be kept?”
With focused discipline and continued maturation, I believe it can be.
David Klein is CEO & Co-Founder of CommonBond, a student lending platform that provides a better student loan experience through lower rates, exceptional customer service, and a commitment to community. CommonBond is also the first company to bring the 1-for-1 model to education and finance. Prior to CommonBond, David worked in consumer finance at American Express and advised clients in the financial services industry at McKinsey. David attended business school at the Wharton School.