User #55981091 wants a vacation. $10,000 should be enough to cover a couple of weeks of beach time. The problem is he doesn’t have the money.
Fortunately, there are plenty of people willing to lend it to him. Thanks to the online platform Lending Club, he already has 82 percent of the cash – from 187 different lenders.
He doesn’t know any of them and because of his high-risk credit rating, he’ll have to pay them about 20 percent interest. But that’s better than it would have been from a bank, where the vacationer probably would get no loan at all.
Welcome to the world of peer-to-peer-lending. What began as a more democratic alternative to conventional banks a few years ago now attracts millions of users, both borrowers and investors.
For individuals, it is a faster and cheaper way to borrow money. Likewise, anyone who has money lying around can be a lender and pocket yields of 5 to 8 percent on average.
Innovative online companies rely on algorithms to spread their risk across the masses, making traditional bank loans look very old fashioned.
Innovative online companies rely on algorithms to spread their risk across the masses, making traditional bank loans look very old fashioned. The model is growing so rapidly that banks are seeking partnerships or investing in these businesses to profit from the peer-to-peer boom.
Currently, market leader Lending Club and other businesses such as Prosper hold 2 percent of consumer loans issued in the United States. But their share could rise to 15 percent by 2025, according to a study by the investment bank Goldman Sachs. In the long term, 25 percent of the $843 million ($770 million) market could move to these new platforms.
More and more startups are finding ways to poach customers from traditional banks – including in Germany, where peer-to-peer lenders issue a much smaller share of loans than in the United States. Yet there is growing movement in the country’s market for new financial technology.
The biggest peer-to-peer consumer lender in Germany is Auxmoney, which announced in June that it had 1 million members.
Zencap, which finances mid-sized companies, claims to be Europe’s fastest growing online credit marketplace, with a company record of €4 million ($4.4 million) of loans issued in June.
These so-called fintechs (financial technology start-ups) could earn 4 percent of all German retail banking yields by the year 2020, says the consulting firm AT Kearney.
To the traditional finance world, fintechs are both an opportunity and a threat. Quietly, banks, hedge funds and fund managers are joining the ranks of creditors. They are searching for strong yields in these times of low interest rates – and peer-to-peer platforms seem like a paradise.
According to industry estimates, 80 to 90 percent of loans on Lending Club and Prosper are financed by institutional investors. Lending Club issued $1.6 billion in loans in the second quarter of 2015. For Prosper, the figure was $912 million.
Professional investors’ enthusiasm is so great that BlackRock, the world’s largest asset management company, launched the first-ever security on the market secured by consumer loans from Prosper.
In light of such developments, the term “peer” might no longer be appropriate when describing the business model. After all, this is not just about peers lending each other money.
Lending Club and Prosper recognize this and have discreetly introduced a new term – “marketplace lending” platforms. Sometimes this kind of lending is also called “crowd-lending” or “crowd-investing.”
When Lending Club went public this year, the term peer-to-peer was nowhere to be found in its prospectus, perhaps because it has entered into partnerships with a number of regional banks, in addition to financial giant Citibank.
Yet this new way of granting credit also gives traditional banks cause for concern. “Silicon Valley is advancing,” warns Jamie Dimon, head of JPMorgan Chase. Goldman Sachs is even developing its own credit marketplace.
Four strategies are emerging as established institutions adjust to these new competitors: They install their own platforms, like Goldman Sachs; they appear alongside small investors as lenders on Lending Club and others; they invest in startups; or they cooperate with the new competitors – a practice that looks very promising to Jürgen Fitschen, co-chief executive at Deutsche Bank.
“Many new companies in the fintech sector aren’t so much new competitors as partners with whom we can achieve easier access to banking products and generally achieve a higher quality of service,” he said.
Not everybody shares this view.
“Money needs no bank” is the slogan at Lendico, the credit platform of Berlin-based online incubator, Rocket Internet.
“Lendico was developed right from the start as a digital alternative to banks,” said co-founder and chief executive Dominik Steinkühler.
“Amazon and Zalando weren’t bothered by the fact that book and shoe shops already existed.”
The industry will continue to develop in this area as start-ups encroach on ever more traditional banking sectors.
That comes down to entrepreneurs like Krista Morgan, the boss of P2Bi in Denver, Colorado, which provides big loans to mid-sized companies. The loans are secured against the borrower’s accounts receivable –money it is owed by clients – and then offered to investors on its website.
Ms. Morgan has ambitious aims.
“All the services up to now are limited to loans up to $500,000,” she said. “We want to be the biggest provider of multi-million dollar loans.”
She is well on the way. The first seven-figure loans have already been agreed via her platform, and now she is investing heavily in technical infrastructure.
“Having the right data is the key,” said Ms. Morgan. “We have clients who are growing very fast and often considered too risky by the banks.”
The demand from such clients is growing steadily. The start-up provides companies with fresh money within five days. It can take up to three months with banks.
Despite that, P2Bi has never had a credit default. In the last business year, which ended in March, loans amounting to $18 million were granted via Ms. Morgan’s platform, with 11.5 percent average returns for investors.
The Berlin startup Zencap, another offspring of Rocket Internet, also concentrates on loans to companies.
Video: A British-based peer-to-peer lender explains how the idea works.
Banks, savings banks and cooperative banks are already groaning at the tough competition. “Amazon and Zalando weren’t bothered by the fact that book and shoe shops already existed,” noted Zencap co-founder Christian Grobe.
The start-ups are taking an increasingly large share of profits from traditional banks. Goldman can see a worst-case scenario of the entire business loan market, worth about $186 billion, going online.
And that is just the beginning. Fintech companies also have their eyes on student loans and mortgages for private houses and office buildings.
Not all of these startups will be successful. But the trend is clear. In the next five years, Goldman estimates that digital credit platforms will deprive U.S. banks of $11 billion of a total of $150 billion in profits.
For some banks, cooperations with these new lenders might make sense – like the one between Zencap and Sparda-Bank in Berlin. The cooperative bank’s 500,000 members can invest in local Zencap projects at advantageous rates.
Politicians are also behind the idea. “I would be pleased to see my savings bank not just take my money, but make me offers to invest in the construction of an old people’s home or in a regional company,” said Gerd Billen, secretary of state in the ministry for consumer protection and justice.
Yet the German industry struggles with this kind of thinking. In the United States, Mr. Billen said, the approach is different. There, innovators tend to challenge what already exists – and figure out how to make it superfluous.
Astrid Dörner is part of Handelsblatt’s team of correspondents covering finance in New York. Frank Drost is a Handelsblatt editor covering finance and banks. To contact the authors: email@example.com and firstname.lastname@example.org