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Peer-to-peer lending is on the rise. Just today, for example, two P2P lending companies — Prosper and Kabbage — announced a combined $120 million in funding.
And by 2025, according to a report from Foundation Capital due out tomorrow, $1 trillion in loans will be happening this way each year. Many of them will come from the literally dozens of P2P lending companies listed in Foundation’s market landscape chart, above.
Foundation Capital’s Charles Moldow is making his prediction based on his analysis of the market’s potential. Prosper and Lending Club alone facilitated just $2.4 billion in loans last year, which might sound like a lot until you compare it to the $3.2 trillion in lending activity generated by banks, credit cards, and other, more traditional lending institutions.
And yet, Moldow argues, online lending marketplaces offer significant advantages in efficiency, cost, and more. For example, he says, the typical P2P lender has a cost advantage over traditional financial institutions of 400 basis points (4 percentage points). The savings has chiefly to do with avoiding costs associated with owning and maintaining branches, and with regulatory costs (FDIC insurance, for example).
A difference of 4 percentage points provides a powerful financial incentive to move loans from a less efficient market to a more efficient one: If you had to choose between a loan at 8 percent and one at 4 percent, you’d borrow at 4 percent. Or, more likely, you’d choose a loan at 6 percent, because the marketplace would be pocketing the other 2 percent of savings as its profit — which might explain why venture investors like Moldow are so interested in these marketplaces as growth businesses.
If these marketplace lenders don’t run afoul of regulatory issues, security disasters, or other problems, they could present a powerful competitive alternative.
Kabbage is a financial and data technology company that pioneered the use of unique yet compelling data sources to radically change the way small businesses obtain capital. In just two years, Kabbage has become the number one online pr... read more »
Prosper Marketplace, headquartered in San Francisco, is a leading online marketplace for consumer credit. Prosper (www.prosper.com) connects people who want to borrow money with people who want to invest money. With a commitment to pro... read more »
Charles joined Foundation Capital in 2005, with a background in general management, sales, marketing, product management, and business development. Before coming to Foundation Capital, he was part of two teams that successfully built c... read more »
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