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Bloomberg article explores global P2P growth

That is the question implied by a recent Bloomberg article which analyses the rapid growth of P2P in the US and around the world.

In fact, the piece’s author Edward Robinson puts it more dramatically, asking, “Is peer-to-peer lending out of control?” as well as, “Is P2P a revolution or just another bubble?”

He points out that loan volume through these platforms is expected to hit $77 billion in 2015, a 15-fold rise on three years ago while Lending Club, the world’s biggest P2P lender, is now valued at around £7 billion.

On this side of the Atlantic, the potential inclusion of P2P loans in a new type of ISA could provide a huge boost to the industry – Bloomberg cites figures from investment bank Liberum Capital which suggest this move could boost total lending by around £150 billion by the end of the decade.

But aside from the sheer size of the P2P market and the speed at which it is growing, Robinson also notes concerns over the fact that loans are now being packaged up into securities by the same institutions that brought us the global financial crisis:

“And now Wall Street is cranking up the volume by running these loans through its securitization machine. In November, Morgan Stanley and Goldman led the sale of securities backed by $303 million in student loans originated by US refinancing firm SoFi. In February, BlackRock unveiled the first investment-grade-rated package of P2P consumer loans with a $281 million offering of notes from Prosper Marketplace, a site that lets users apply for loans as well as back them.”

The securitisation of trillions of dollars’ worth of sub-prime US mortgage loans was perhaps the most significant contributory factor to the credit crisis and ensuing meltdown. As such, it is understandable that observers might become a little nervous if a relatively new type of credit – in this case P2P loans – looks like it is being dealt with in a similar way.

But are there really any more serious parallels with the sub-prime crisis? Is there genuine cause for concern?

Many P2P lenders are keen to point out that they do not offer credit to sub-prime borrowers – indeed, for a firm such as Zopa, the quality of the loan book has been a fundamental part of its approach since it was set up in 2005.

As such default rates across the sector have so far been very low; at the same time, the leading lenders diversify funds across 100s or even 1000s of borrowers with some including Zopa having safeguard funds in place to mitigate the impact of potential bad debts.

But it is worth bearing in mind that the real problem with the sub-prime crisis was not so much that lots of people became unable to repay their mortgages. It was rather that the banks who had invested so much money in mortgage-based securities had completely misunderstood – and therefore mispriced – the risk they presented.

The P2P industry is much more transparent – in the UK for example, the three leading lenders make their loan book details available to the public via a tie-up with analyst AltFi Data. This means that borrowers, lenders and other interested parties can see where the money is going as well as what risk levels and potential returns are.

The pace of P2P growth has certainly been impressive over the last few months, and it is perfectly reasonable to ask whether this growth could present any problems. But the suggestions so far are that, in this sector at least, the lessons of the financial crisis have been well and truly learned.