P2P Time to Shine

This week the world’s largest peer-to-peer finance platform became the first such company to go public, listing on the NYSE with a valuation of over $5bn.

The Lending Club IPO is one of the biggest of 2014 and will attract a lot of investor and public attention. With a second peer-to-peer IPO – for OnDeck Capital – following fast on the heels of Lending Club, excitement could reach fever pitch.

The impact on the rest of the industry will be significant. A couple of successful IPOs for this new business model will lead to a lot of expert investors and analysts pouring over the other leading players in search of the next big payout. That demand for ‘the next Lending Club’ will immediately inflate the value of existing peer-to-peer providers and help them to raise more money for expansion. If good quality platforms can access significant capital, their ability to compete with the banks and other traditional finance providers will be enhanced and the already rapid growth of the industry could be boosted further. New interest in the sector will mean platforms are able to market products more effectively, attract more talent, and drive more innovation.

This is particularly exciting for UK peer-to-peer companies. Support from Government for the sector will act as another spur for growth in 2015. The UK financial services sector is ripe for disruption. Public faith in banks – so spectacularly lost – will not be easily recovered. As consumers increasingly expect online delivery of products and services, expensive branch networks, legacy tech problems and regulatory firefighting are heavy burdens to carry and customers do not want to pay the cost of previous bank failings. However the banking crisis is not the cause of tech led financial services disruption, such as peer-to-peer lending, but merely a catalyst, accelerating an inevitable trend.

Still, the peer-to-peer sector facing important challenges.

With high speed growth comes increased risk. The new investment in the sector – including the public market investment in Lending Club and OnDeck – will make new demands of platforms. The success of individual peer-to-peer finance providers and of the industry in general, will rely heavily on originating high quality loans. It’s pretty easy to give money out, the hard bit is making sure it comes back. Platforms will live and die by their default rates and it’s imperative that the new investor pressures don’t result in platforms originating significant volumes of poor quality, inadequately priced loans. Whilst the short-term temptation might be to drive as much lending volume as possible to achieve higher valuation, medium-term success will depend on how well platforms can price those loans for risk.

The Lending Club IPO has been described as the ‘Netscape moment’ for the peer-to-peer industry. There is a lot of truth in this characterisation, the sector will become the centre of attention for a little while and should extract a lot of benefit from that. One of the key values of the industry so far has been the commitment to transparency and good business practice. This has led to significant Government and regulatory support in the UK and elsewhere. It’s important that the sector retains its ‘good guy’ reputation throughout this period of investor attention. Under such scrutiny, the only way to appear the ‘good guy’ is to actually be the ‘good guy’.

Peer-to-peer finance bears the same hallmarks of technology led market disruption that have fundamentally re-modelled industries like music, publishing, and travel.  The Lending Club IPO could be the first of many success stories in the industry, and perhaps marks the moment peer-to-peer will begin its serious assault on the old banking structures that no longer work effectively for borrowers and savers. For now it is only an opportunity, not a certainty, but the opportunity is huge.

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