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.