Yesterday marked a significant milestone in the evolution of peer-to-peer finance with the American P2P firm Lending Club making its Wall Street debut.
Lending Club was launched in 2007 and has become the largest P2P lender in the world.
Its initial public offering (IPO) valued the company at around $5.4 billion (£3.5 billion) and for P2P finance around the world, the listing represents a significant step into the mainstream: the New York Times has gone as far as to say Lending Club will “carry the hopes of an entire industry”.
Zopa’s CEO Giles Andrews says:
“Lending Club’s IPO is an exciting step forward and shows that the P2P sector is maturing fast. The scale of this listing is a clear sign of the effect that peer-to-peer lending is having on finance and you can expect people to pay much closer attention now.”
The San Francisco-based company has grown at a prodigious rate in the last few years as the US public has taken P2P lending and borrowing to its heart.
By the end of 2012 it had lent $1 billion in five years of operation: in the following 18 months, the total rose exponentially to hit $5 billion last summer. Much of Lending Club’s recent success has been down to the fact that it allows institutional investors to use its platform to make smaller-value loans that would be uneconomical through their own channels.
This is the kind of change that is starting to happen in the UK. In last week’s Autumn Statement, the Chancellor George Osborne said that the Treasury was looking at ways to encourage institutional investing through P2P platforms by cutting red tape.
Alongside proposed reforms such as allowing P2P loans to be included in ISAs and allowing tax relief for bad debts, it is clear that this form of finance has long since left its niche status behind.
Lending Club’s US rival OnDeck – which specialises in lending to small and medium-size enterprises – is also planning its own IPO in the coming weeks.
Financial trumps social
One minor detail of Lending Club’s history is worth mentioning. The company started up as one of the first Facebook applications, and it had a slightly different approach to matching lenders and borrowers.
The firm’s algorithm was originally set up to find customers who had shared interests, lived in the same area or had other affinities, based on their Facebook profiles: the theory was that borrowers would be less likely to miss repayments to lenders that they could relate to in some way.
Within a year or two, Lending Club had given up this approach and started matching funds in a more cold-eyed fashion, primarily making use of factors such as loan term, credit rating and desired interest rate.
Perhaps this is a useful insight when we think about the wider sharing economy. Much has been made of the social side of the likes of Airbnb, where property owners can entertain (paying) guests and new relationships can, in theory, be forged.
But this should not obscure the fact that in the sharing economy, the economy is the important bit. Unless these services are making money for the sharers and saving money for the customers, they are unlikely to enjoy the same kind of long-term success as Lending Club and its ilk.