Can better products and lending practices heal marketplace lending’s hangover?

The tide is waning for marketplace lending. As Warren Buffet once said, we are now about to see who has been swimming naked.  However, contrary to panicked media reports, the industry is not in danger. It is just dealing with a hangover.

Marketplace lenders experienced incredible growth since 2010, with annual origination volumes on Lending Club and Prosper – the 2 largest marketplace lenders — rising from $153 million in 2010 to over $12 billion in 2015.

In 2016, the trend reversed. For Lending Club, total originations for Q2 2016 came in at $1.96 billion, down from a peak of $2.75 billion in Q1. In 2Q15, Prosper reported a steep decline of over 50% in originations compared to same period a year before.

Marketplace lenders are trying to explain the change. “The decreases above are the result of a number of our largest investors that have paused or significantly reduced their purchases of whole loans through Prosper’s marketplace,” the company stated in its recent quarterly report. It promised to take steps to increase available capital by increasing the interest rates on loans, launching a new line of asset management products and improving the retail investor experience.

The hype can be clearly seen in PwC’s DeNovo quarterly report, which tracks fintech trends. Marketplace lending was the top trend for the first three quarters in 2015, but dropped to the second-largest trend in 4Q15. In 1Q16, the industry did not even make the top 10.

“Back in late 2015 everyone was getting into the space, and there was too much optimism” said James Wu, founder and CEO of Monja, a marketplace lending analytics company. Now, he adds, smarter investors are looking at data more carefully and can generate better returns. “From our own analysis, we see some of the returns for platforms are better than they have been in the last 24 months. 2015 was a great year for platforms, but from an investment perspective, the returns were low.”

According to Wu, an excess of funding in 2015 caused marketplace lenders to desperately look to expand their borrower base, venturing into lower tiers of credit, pushed by aggressive marketing techniques like direct mailing.

The repercussions of such action are now visible with a rise in delinquencies and a damning report from Moody’s questioning the viability of the asset class. “Investor overreacted to that news,” said Wu, adding that the 2015 vintages are hurting current performance, overshadowing newer and better vintages that will generate long term growth and returns for investors.

Though each platform comes with a built in set of analytics tools that allow investors to select loans according to their risk appetite, third party analytics companies, such as Monja or Orchard, can give investors the ability to work across multiple platforms and provide deeper insight into the sources of excess returns. Such strategies are of course harder than dumping money into all platforms as some investors did a year ago.

Unlike other sources of capital, securitizations of marketplace loans are trending upwards, topping $1.7 billion according to PeerIQ, and will probably become a more substantial source of capital for marketplace lenders. This, however, is a far cry from marketplace lending’s P2P origins.

Marketplace lenders are at a crossroads. The resulting shakeout, however, might prove to be beneficial to the market.

“Investors are getting more realistic about returns, and platforms are getting more realistic about what they can get away with. They need to come back and offer products that are compelling for investors,” Wu concluded.

4 essential presentations on marketplace lending

best presentations for marketplace lending

Marketplace lending is rapidly evolving. From its startup roots, the industry is maturing along the lines of other robust lending industries: that is to say, the volumes of originations are ramping and securitizations — the packaging of pools of marketplace loans into securities and selling them off to institutional investors — are underway.

Interested in learning more about the industry? Tradestreaming has compiled an A-list of some of the best presentations and slideshares on marketplace lending. From the beginner to the advanced, these marketplace lending presentations have something to offer everyone.

Marketplace Lending: Evolution of an asset class

Author: Ron Suber (President of Prosper)

Prosper was a pioneer in the US in peer to peer loans. The model has changed as institutional capital has been injected into the industry, but it’s also meant that the industry has grown up a bit. Ron Suber, Prosper’s President, has been a major player in the maturation process that’s seen the industry grow from nothing in 2006 to an expected $122 billion in origination by 2020. Suber’s presentation, delivered at the LendIt Conference, does a great job describing where marketplace lending came from and where Suber and Prosper believe it’s headed.

A trillion dollar market by the people, for the people

By: Charles Moldow (Foundation Capital)

Charles Moldow, of Foundation Capital, is considered one of the most influential investors in the marketplace lending space (you can hear an interview Tradestreaming conducted with Moldow). In fact, he’s credited with coming up with the new name for the industry — marketplace lending — replacing P2P lending, which is how the industry began. In this presentation, Moldow, who was an early investor in Lending Club, lays out the early thesis behind investing in the industry and shows the revenue production possible if marketplace lending is successful in just capturing a small percentage of lending business from the banks. Indeed, he believes that marketplace lending can grow to be a trillion dollar industry.

Transforming the banking system into an online marketplace

By: Renaud Laplanche (Lending Club founder, CEO)

As Lending Club became the first consumer marketplace lender to hit public markets, its CEO and founder, Renaud Laplanche has become kind of a de-facto spokesperson for the industry. This presentation, delivered at the 2014 LendIt conference focuses on how the banking industry hasn’t enjoyed many of the same efficiency gains other industries saw in the era of the internet. Laplanche demonstrates how marketplace lending can replace some of the core functions of the banking sector, and in doing so, provide a solid product to market participants and make a lot of money.

Why marketplace lending is better

By: Samir Desai (Funding Circle)

While the other presentations have focused on consumer lending on marketplace lending platforms, Funding Circle’s founder, Samir Desai’s video, from Lending Europe 2015, describes his firm’s opportunity in SMB lending. Funding Circle is the leader in this type of marketplace lending globally. This video delves into not just what marketplace lending is, but why it can be seen as better than traditional models. Desai describes how his platform matches supply and demand and how a marketplace lender should be fundamentally less risky than a traditional balance sheet lender.



Is the marketplace lending industry in trouble? Here’s what we know.

what's going on with marketplace lending

There’s been a lot of chatter recently about the state of the marketplace lending industry. Unfortunately, it’s been a little noisy, as both positive and negative data points have been released.

Here’s what we now know:

On the negative side

Demand dropping for marketplace loans, marketing efforts curtailed: Growth is slowing and that’s because the appetite for marketplace loans is dropping. Some platforms have seen loan volume drop over 20% from Q3 to Q4 of 2015. The first quarter of 2016 doesn’t look to be any better. The marketplace lenders are responding by dialing back their marketing efforts. If the Fall of 2015 was a bull market for the advertising of marketplace lending products, the market now appears to be pulling back. Lending platforms are throttling the volume of direct marketing postal pieces they’re sending to potential borrowers.

According to the WSJ, Avant, for example, cut the number of loan offers it mailed to customers by nearly two-thirds, from 4.6 million to 1.7 million, between December and February. This will have a big impact on revenue growth — if direct mailing was the gas in the origination tank, the industry will have make do with less going forward.

Today or tomorrow, regulation is coming: In March of this year, the Consumer Financial Protection Bureau (CFPB) began accepting consumer complaints against marketplace lenders. Right now, though loan standards at marketplace lenders are proscribed like any other entity that offers loans, there isn’t any single regulatory body or set of regulation that governs the marketplace lending industry. Most experts expect that to change and there’s a growing feeling that it will be sooner, rather than later. The newly announced Marketplace Lending Association appears to be an attempt by industry participants to create momentum behind self-policing, at least in the interim, to stave off initial regulatory attempts. More regulation could lead to more compliance costs and tighter lender criteria, squeezing revenues and profits for the platforms.

Lower end of credit spectrum deteriorating: It feels like the consumer economy is beginning to roll over. This will test marketplace lenders’ credit models in a way this young industry, which came of age after the 2007-2008 credit crisis, hasn’t yet been tested. Cracks are beginning to form: alarmingly, the lower end of the credit spectrum for marketplace borrowers is deteriorating. Higher quality loans look to be relatively stable but charge-offs on the lower quality spectrum are significantly above historical norms.

ranking the largest marketplace lenders
from the NYT

On the positive side

More institutional investors are entering the space: A recent survey conducted by Richards Kibbe & Orbe and Wharton FinTech polled 300 institutional investors in the U.S. The results of the 2016 Survey of U.S. Marketplace Lending showed that half of all investors have some exposure to the marketplace lending industry. That’s up from 2015 numbers which showed less than 30% of investors were active in the space. More institutional liquidity means more loans get funded.

Debt market slowly forming: There’s another sign that the marketplace lending industry is maturing — securitization of loan portfolios. As loan markets mature, new investors step in after the originators to invest in portfolios of loans. That’s beginning to happen. In the last three months of 2015 alone, there were 9 such deals for a total of $2.7 billion in the U.S. market, more than five times the dollar-value of the same time period in 2014, according to PeerIQ.

Platforms trying to encourage more balance between retail and institutional investors: There are signs that marketplace lenders want to reduce their dependency on institutional capital. Mom and pop investors account for around 20% of the investment capital on LendingClub’s platform. And according to the FT, the retail channel has grown at a respectable 61% over the past three years, while institutional lenders (including managed funds and family offices) have gone up at more than twice that rate. There’s reason to believe that this capital is encouraging marketplace lenders to aggressively expand by relaxing lending standards. Balancing the investor mix would make these firms more resilient in a poor market environment.

Marketplace lending association forming: In response to concern about the introduction of more sweeping regulation of the marketplace lending industry, some of the largest online lenders announced they were forming a marketplace lending industry trade group. The three founding members of the Marketplace Lending Association were LendingClub, Prosper, and Funding Circle. If the industry is going to continue growing at a fast clip, the thinking goes, there will need to be a unified body to help counterbalance plans to regulate by speaking of one voice.

Lending Club’s founder and CEO, Renaud Laplance spoke at an industry-wide conference this week in part, to allay participants’ growing fears that something is afoot. He addressed concerns about regulation by explaining that there is actually a significant amount of legacy policy that covers the marketplace lending industry.

Further, in his estimation, there’s no need to worry — the industry is doing just fine. It’s just a matter of perspective.

“If you look at online travel, the music industry, you look at the video industry, and you look at the adoption phase over the first decade, you see that roughly 44% of customers adopt new products and switch from the incumbent within first decade,” Laplanche spoke at the Lendit 2016 conference. “If we follow this metric through with the first product that was launched in this industry – the first segment was launched about 8 years ago, the personal loan– about 24% were originated through [marketplace] platforms. So we’re right where we should be in terms of adoption curve.”

Professional marketplace lending association aims for clarity, transparency

best presentations for marketplace lending

Fintech professionals and observers say the founding of a professional organization to promote responsible business practices among marketplace lenders is a landmark for the industry, which grew from infancy in 2006 to $12 billion in 2014, and is expected to reach $122 billion in origination volume by 2020.

Nick Clements, founder of price comparison website and a regular commentator for Forbes, told Tradestreaming that the formation of the Marketplace Lending Association (MLA) on April 6 will give the sector an important voice, as federal and state regulators start to look more closely at the sector.

“There is not a lack of regulation in the U.S.,” Clements explained. “In fact, there is a lot of regulation from varying agencies and states. But what is missing is a clear regulatory framework,” he said.

In an email exchange on April 12 from the Lendit 2016 conference, Clements said most CEOs at the gathering spoke about welcoming regulation, and added that there is an overall feeling in the marketplace lending sector that the industry is inherently consumer-friendly. Most felt their businesses would benefit (with investors, for example) by having regulatory clarity.

“There is ambiguity in a number of places, and that needs to be addressed,” he said. “For example, Madden vs Midland Funding raises questions about the maximum rate that can be charged (and portability of rate) for a typical marketplace structure. Or take the issue of a national lending license for non-depository institutions. This went away with Dodd-Frank and would help marketplace lenders avoid having to get licensed and audited by 50 different state regulators.”

The MLA was founded by credit marketplaces Funding Circle, Lending Club (NYSE: LC) and Prosper. Officials for the Association said the group will also lobby for sound public policy to benefit borrowers and investors. The group’s Marketplace Lending Operating Standards outlines fair lending practices, provides guidelines for appropriate risk management models and especially calls for transparency for all parties involved in marketplace lending, including investors, borrowers and regulators.

The Association is governed by a Board of Directors, which will initially consist of one Director nominated by each founding member. As more marketplace lending companies join the MLA, additional directors will be elected based on a vote of the full membership. The MLA intends to hire an executive director and staff as it continues to expand.

“The launch of this Association reflects our industry’s commitment to the highest standards of transparency and customer protection, while also delivering innovative new ways to provide better value and experiences for consumers, small businesses and investors,” said Funding Circle Co-Founder and U.S. Managing Director Sam Hodges in a prepared statement. “In the fast-growing marketplace lending sector, we want to continue to act as a thought leader and thought partner to the appropriate bodies in Washington to ensure continued innovation and responsible growth in the sector.”

The group says it aims to bolster the growth of the marketplace lending industry, as well as to ensure transparency and efficiency throughout the sector. To accomplish that goal, the group has published a professional code of ethics, the Marketplace Lending Operating Standards, to address issues including transparency, responsible lending practices, governance and controls, and risk management.

Debt market opens to P2P loans

P2P Lending's Developing Debt Market

Last week British investor Fintex Capital issued the first Euro-denominated bond backed by marketplace loans. Like traditional bonds, it can trade through Euroclear and carries an International Securities Identification Number, but it is backed by a bundle of unsecured online loans to consumers, part of a rising phenomenon known as peer-to-peer, or marketplace lending.

It is the latest sign that marketplace loans are emerging as a mainstream global financial asset class driven by institutional investors. 

“Marketplace lending is here to stay,” said Robert Stafler, cofounder of Fintex, which placed the first Euro bond last week with a group of institutional investors. That bond, worth up to 100 million euros, is backed by loans from auxmoney, Germany’s leading peer-to-peer marketplace. “It will have an ever growing place in the enormous credit landscape of every country, in every vertical.” 

The amount of money involved in this particular Fintex deal may be relatively small, but it, and a series of wider issues of securities backed by marketplace loans on the U.S. market, show that institutional investors — who make up 80% of the capital behind marketplace loans — are increasingly active in the space. Consequently, institutional investor participation is improving the liquidity and sophistication of this rapidly growing industry that set out to be an alternative to traditional banking.

This raises the question about whether marketplace loans are an alternative to banks, giving regular folks new access to lending or borrowing money, as they set out to be; or simply another debt instrument.

“The increasing trend of securitizations from well known firms, such as Citigroup and Blackrock, may have served as the industry’s tipp​ing point into mainstream financial institutions that are in search for yield,” said Blake Coler-Dark, who spent three years spearheading relations with institutional investors for Lending Club, a leading U.S.-based marketplace loan platform and is now chief investor relations officer at FundersClub, a San Francisco-based equity crowdfunding platform.

Along with marketplace lending’s shift to the mainstream come rising concerns about stability and regulation, especially around the liquid derivatives based on these loans. American investors demonstrated some of this squeamishness last week, when a securitization of loans originating from the marketplace lending platform Prosper, fetched a yield almost twice the size as a year ago.

Peer-to-peer lending first appeared about 10 years ago, as a fringe, democratic alternative to banks. Platforms like U.K.-based Zopa, founded in 2005, and California-based Prosper and Lending Club, both founded in 2006, utilize the power of big data and social networks to allow individuals to borrow money from other individuals.  Algorithms quickly evaluate one’s credit risk, often resulting in immediate and cheaper loans for borrowers because these online platforms do not have the overhead and lending regulations that banks do.

The industry then ballooned in the wake of the 2007-2008 global financial crisis, when banks began to reduce credit prompted by a capital crunch and new regulations enacted after the collapse of mortgage-backed securities. In 2014, marketplace lenders made $24 billion in new loans, up from $1 billion in 2010, according to Morgan Stanley. By 2020, the bank has forecasted as much as $490 billion will be issued annually in such loans around the world.

With smaller returns on many assets in the current low-interest rate environment, institutional investors from big names like Goldman Sachs and BlackRock Financial Management, to boutique firms, like Chicago-based Victory Park Capital, have been scooping up marketplace loans. According to Orchard Platform’s U.S. Consumer Marketplace Lending Index, 12-month returns on these loans are running at 6.41%, compared to a 2.5% on Barclays Aggregate Bond Index.

“While borrowers created the need for these platforms, it has really been the investors — those funding the loans — who have propelled the industry forward,” Orchard Platform, a technology provider to institutional investors in marketplace lending, wrote in a recent white paper.

But the reliance on institutional money has some worried about whether this source of capital could dry up once interest rates begin to rise. Having come of age following the global financial crisis, the new industry has yet to experience monetary tightening.

“Changes in the macro economy and a rise in interest rates is a valid concern, but it’s all relative,” Coler-Dark said. “Rates are now trickling up, and as a result, the cost of capital for the lenders and hedge funds utilizing leverage facilities could lead to a margin squeeze, potentially forcing the investors to look elsewhere for higher illiquid yield.” The lending platforms have responded quickly to the changing environment, by raising the interest rates on their loans following the U.S. Federal Reserve’s interest rate hike in December.

To distribute their risk and create liquidity, investors have increasingly been selling off loans as securities, carrying out 9 such deals for a total of $2.7 billion in the U.S. market in the last three months of 2015 alone, more than five times the dollar-value of the same time period in 2014, according to PeerIQ.  Since the first deal in 2103, there have been 41 issues of securities-backed marketplace loans, worth a total of $8.4 billion. 

Fintex’s Stafler said he expects the first full-fledged securitization on the European market later this year. Bundling the loans into securities and bonds also makes them more accessible for institutional investors, like pension funds, who do not want the hassle of buying loans directly from platforms, Stafler said.

But recently, interest rates have been rising on issues of securities backed by marketplace loans, and this is worrying, said Ram Ahluwalia, chief executive of PeerIQ, a risk-management firm focused on marketplace lending. Ahluwalia, who is familiar with the terms in a handful of recent deals, remarked that in some cases, the interest rates demanded by investors in securities backed by marketplace loans were higher than the interest rates on the underlying loans themselves. In general, interest rates on marketplace loan-backed securities are about 500 basis points higher than a year ago, Ahluwalia said.

“The last couple of months have seen an increase in financing costs, it’s a pricing problem,” he explained. It partly stems from higher yields in general for asset-backed securities, as concerns continue over low commodity prices and economic slowdown. But it also shows that investors see risks in marketplace loans, especially as there has been a slight uptick in delinquencies, according to Ahluwalia. 

Analysts who follow the industry have taken note.

Marketplace risk management and consultancy MonJa recently highlighted Lending Club’s data that show some recent loans to lower grade investors have slightly increased charge-offs. “Investors should closely monitor more recent vintages of lower grade Lending Club loans,” MonJa said. In February, Moody’s downgraded bonds issued by Citigroup that were comprised of loans made through Prosper Marketplace.

On the other side of the Atlantic, Stafler said such trends could put a damper on emerging European appetite for the development of this new asset class, but he emphasized that the underlying risks to investing in German or British marketplace are lower. Unlike in the U.S. market, in Europe there is little correlation between rising unemployment and growing consumer loan default, he said.

“Here it’s a lower risk and lower return environment,” he said.

Concerns are also mounting about increased regulation, especially in the U.S. market, where the Treasury Department, Congress and other federal agencies are in the process of gathering more information on the industry. The Consumer Financial Protection Bureau recently opened a department dedicated to marketplace lending, and a federal court case is examining if marketplace lenders should be subject to state usury laws.

“That is part of what happens when you become a successful industry,” Ahluwalia said.  “But maturation is still a long way off.”

The Startups: Who’s shaking things up (Week ending December 6th, 2015)

fintech startups shaking things up

[alert type=yellow ]Every week, Tradestreaming highlights startups in the news, making things happen. The following is just part of this week’s news roundup. You can get these updates delivered direct to your inbox by signing up for the Tradestreaming weekly newsletter.[/alert]

ApplePie Capital’s Denise Thomas on enabling investors to lend money to the right franchises, franchise owners (Tradestreaming)
Online lending marketplaces are changing the way capital is deployed and ApplePie has an interesting approach: small business loans to franchisees.

Cookies Wants To Become The Venmo Of Europe (TechCrunch)
Cookies is all about paying your friends without any fees. And now it intends to massively expand in Europe.

Trulioo’s Stephen Ufford: “Missing element to provide financial services for the 2.5 billion unbanked lies in a digital footprint” (Tradestreaming)
User identification is a seemingly simple problem, yet it stands in the way of truly opening up fintech applications. Until now, doing it well has remained elusive. Trulioo is trying to change that.

Number26 Launches Its Bank Of The Future In 6 New Countries (TechCrunch)
If you don’t like your current bank, Number26 may appeal to you. The German startup has been trying to reinvent the average banking experience in Germany and is now expanding throughout Europe.

Wealthsimple acquires online brokerage pioneer ShareOwner (Newswire)
Largest Canadian roboadvisor ($400M), Wealthsimple acquires online brokerage, ShareOwner.

SoFi’s Mike Cagney on valuation (Business Insider)
SoFi CEO Mike Cagney thinks the company could be a $30 billion business. Will he be right?

Startups raising/Investors investing

Australian Fintech Tyro Payments Raises $72M Led By Tiger Global (TechCrunch)
Australian financial tech company Tyro Payments plans to challenge the country’s leading retail banks after scoring AUD $100 million (about $72 million).

Bee Raises $4.6 Million to Deliver Banking Services (WSJ)
Banking startup Bee (which provides bank accounts, debit cards and financial services aimed at people who live in low- and middle-income neighborhoods) secures investment capital.

Clearpool secures $8 million investment (Finextra)
The electronic trading software development and agency execution business announced it has received an $8 million investment from growth equity firm, Edison Partners.

SMB Lending Technology Provider Mirador Secures $7M (Let’s Talk Payments)
Lending as a service getting more traction…and more money. Companies like Mirador help banks compete in online lending.

Q2 Acquires Social Money in $10 Million Deal (Finovate)
Formerly known as Smarty Pig, Social Money helps financial services companies better engage their customers by offering them savings solutions such as GoalSaver, a customized, bank-audited goal-saving system.

Startup Tracker’s Jeremiah Smith on how Twitter is a great distribution medium for his complement to CrunchBase (Tradestreaming)
Startup Tracker is changing the way investors and competitors research startups.

Prosper’s BillGuard Unlocks Premium Features for All Users (Finovate)
On the heels of being acquired by Prosper, the expense-management and fraud-tracking application made some of its most popular premium features available for free.

Green Dot to Enter Lending Space with Loan Marketplace (Bank Innovation)
Prepaid player Green Dot is stepping into the lending game with a marketplace for loans. The move will happen in 2016, CEO Steve Streit announced this week.

Photo credit: V31S70 / / CC BY

Marketplace Lending and Personal Finance Apps: A perfect union?

how prosper's acquisition of billguard changes the outlook of the marketplace lending industry

Every week goes by and investment industry professionals read more and more about the growth in the marketplace lending industry. Sure, it can become a trillion dollar market by the people. But it isn’t yet fully online — as much of the marketing acquiring borrowers and investors is decidedly old-school. Combine that with the fact that most of the investors are institutional and you see that while there’s been a lot of progress, the truth is that we’re really still in the early innings when it comes to newer investment platforms.

That’s why when Prosper announced it would be buying a small Israeli finance app called BillGuard, the market should be paying more attention.

Check out my article on Forbes that explains how this quiet acquisition can fill the missing void of engagement in the marketplace lending industry and truly take the promise of peer to peer lending to the next level.


9 ways to improve your investing performance in P2P loans

Source: Federal Reserve,

Yesterday, I discussed why I’m now a believer in peer-to-peer loans as a new asset class for investors.

Now, I’d like to look at how investors can lower their risks of defaults on these types of loans and boost their overall returns.

The problem with P2P loans

Like in most areas where information is asymmetrical between two parties entering a transaction, p2p loans present an informational problem.

Borrowers know a lot more about their potential to repay a loan than those making the loan.

In a traditional banking relationship, banks have resources to attach a number (a credit score) to a loan. Given experience and data, banks can estimate the probability that a borrower with that number will default. It’s an imperfect solution but works (at least, most of the time).

Borrowers on p2p marketplaces like aren’t given an actual credit score. Instead, they’re grouped into categories of credit worthiness which further complicates our ability as investors to assess their ability to pay us back.

Also, because multiple investors invest in the same loan, each individual investor may lack the incentive to do proper research (free rider problem).  That’s according to Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from

How social networks help investors better their returns

To mitigate this problem, p2p loan marketplaces have created their own versions of social networks where borrowers can friend people and organizations.

And you guessed it — these groups are key to helping us investors determine the chance that our investments pay off (or don’t).

Why? Because research has shown that borrowers with friends on these investment platforms are:

  1. more likely to get their loans funded (not necessarily a good thing — we want borrowers to get funded and be more likely to pay).
  2. less likely to default on their loans (bingo!)
Why? It’s all about signaling.

The results suggest that verifiable friendships help consummate loans because they are credible signals of credit quality

Source: Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending

We want to invest in loans that provide us with a good return but are also the “right” type of borrower. Using friends and endorsements are key to solving this issue.

We show that borrowers with online friends on the platform have better ex-ante outcomes. This effect is more pronounced when friendships are verifiable and friends are of the types that are more likely to signal better credit quality. The results are consistent with the joint hypothesis that friendship ties act as a signal of credit quality, and that individual investors understand this relationship and incorporate it into their lending decisions. To further pin down why friendships matter, we examine whether friendships are related to ex-post loan outcomes. We find that borrowers with friends, especially of the sort that are more likely to be credible signals of credit quality, are less likely to default.

9 ways to improve our chances investing in P2P loans

Continue reading “9 ways to improve your investing performance in P2P loans”

Why I’m a converted believer in investing in P2P loans

If you’re like millions of people, you’re probably worried about your net worth.

Pretty worried.

The market’s up and then, it’s down. Jobs are being created and lost. Banks are stable and then they lose $3B seemingly overnight. And politicians? Nobody seems to have a strong plan to get us through and certainly not the political will to see it through.

It’s not entirely clear if the economy is recovering or not.

Investments: riskier, less diverse, zero confidence

If you have investments, you’re probably experiencing the following:

Volatility spikes: The market has the great ability to lull people into a false sense of security and then, wham! You get periods like the beginning of May where it feels like the world is ending. Nothing looks good right now. Nothing feels right, either.

Diversification doesn’t seem to be working: It may be exchange traded funds doing it or just a general move towards passive investing, but all types of investments are moving more in tandem. When stocks go down, they bring down other “safer” assets. The theory of diversification isn’t providing the benefits it promised. That’s where we are — when things are bad, it seems that there is nowhere to hide.

Lack of confidence in reaching financial goals: Many investors are just throwing up their hands. No más. They feel the stock market is rigged (it is, somewhat) and don’t want a part of it. But in an environment where bonds and CDs pay so little, underfunded-for-retirement investors need to reach for more risky assets and are forced to play a game that they don’t want to play.

What if I could tell you that you can triple the returns on the fixed income (bonds) part of your portfolio without taking on more risk?
Continue reading “Why I’m a converted believer in investing in P2P loans”