WTF is marketplace lending?
What is marketplace lending?
Marketplace lenders are non-bank financial institutions that match up borrowers with lenders. Marketplace lenders leverage technology to evaluate and process loan requests. That allows them to cut costs and to streamline loan approvals.
What is the difference between marketplace lending and more traditional forms of lending?
Banks take deposits from their clients and lend them out. The difference in the interest rates they pay out and the interest rates they receive on their loans is their profit.
Marketplace lending is different because these lending platforms do not take deposits or lend their own capital. Instead, they serve as brokerage firms to match up lenders and borrowers, taking a fee for operating the lending platform.
Is marketplace lending regulated? Is it safe to lend via a marketplace platform?
There is government oversight for the industry, but no formal regulation – yet. The industry attracted the attention of the Securities Exchange Commission (SEC) nearly immediately after being founded, and industry pioneers Lending Club and Prosper voluntarily ceased operations in 2008 while they registered their loansas securities with the SEC. Since then, for every loan made on a U.S. marketplace platform, the marketplace must file a prospectus for the loan with the regulatory body.
There is a modicum of risk in all investing. This is especially true with regard to marketplace lending, where most loans are unsecured, meaning they’re not backed by collateral in case a borrower defaults. Furthermore, marketplace loans are not insured, in contrast to bank deposits, which are insured by the Federal Deposit Insurance Company (FDIC).
On the other hand, like all investors, people who lend via marketplaces can decide on their tolerance for risk, and can make use of online automation tools to target the precise amount of risk they can tolerate.
Will marketplace lending replacing traditional lenders?
Marketplace lenders have seen massive growth: the sector has grown from infancy in 2006 to $12 billion in 2014, and is expected to reach $122 billion in loan origination volume by 2020.
On the other hand, the traditional consumer loan market issued $840 billion in loans in 2014, so it would be hard to say that marketplace lenders currently pose a significant threat to the banks. And some banks now buy loans on marketplace lending platforms, meaning some overlap between the sectors is emerging.
Many large financial institutions have made plans to build, buy, or partner to create their own marketplace lending offerings.
Is there a difference between marketplace lending and peer-to-peer lending?
Yes and no. The terms are often used interchangeably today, but there are technical differences between the two. Pure P2P lending is when individuals lend to borrowers, whereas marketplace lending platforms allow institutions to loan out money alongside individuals.
Will marketplace lending pose a threat to traditional credit cards?
Could be. Refinancing credit card debt is typically the number one use for consumer marketplace loans. And according to Nick Clements of Forbes, 78% of marketplace borrowers say they would recommend the industry to a friend, whereas just 9% of traditional credit card customers would do the same.
Of course, it is still too early to tell if marketplace lenders will ultimately pose a serious threat to the credit card industry, but customer-focused lending programs will likely cause the industry to adapt to changing times.