After the explosive growth this year, it would be hard to say that the industry could grow even faster next year but there is a good chance that it may happen for peer lending 2015.
Not only have two successful IPOs brought media attention and new capital to the space, a shifting rate environment and strengthening economy may bring added benefits to investors and borrowers. I’ve talked with several other influencers in the p2p market and put together a list of the factors that could drive peer lending in 2015. Drop me a note or use the comment section below for any thoughts you’ve got on the topic.
Competiton – As of yet, the only p2p platforms open to non-accredited investors have been Prosper Marketplace and Lending Club. Most peer lending platforms are still operating under the older model of exclusive access to accredited investors, those investors with more than $1 million net worth or meeting income requirements. While growth in the p2p space means strong demand from institutions and accredited investors, I think we’ll see another platform launched in 2015 that will permit access to non-accredited investors. Prosper and Lending Club have already shown a path to overcome the regulatory challenges, both on the federal and local level, and the market is just too attractive to ignore.
Of course, Prosper and Lending Club are not the only peer lending sites for your loan. Check out our ultimate review of peer lending platforms for a complete comparison of features and fees.
Market Growth – The peer lending space will see multiple areas of market growth in 2015, most notably geographic and loan type. There are still more than 20 states that prohibit investor access to loans on Lending Club and Prosper though many of these states allow indirect access through a foliofn account. Check out all the states where borrowing and investing is allowed in my post, peer lending sites reviewed.
Massachusetts just opened to investors in February and I believe many more will follow the lead in for peer lending in 2015. The new capital from its IPO will give Lending Club lobbying money and the industry’s track record will put pressure on state governments to open up to the new asset class.
Lending Club has already made the leap into small business, educational loans and medical loans through its acquisition of Springstone. While Ron Suber, President of Prosper Marketplace, told me that Prosper remains committed to personal loans, I think the industry will see an expansion into other loan types this year. I looked at the total U.S. loan market in a recent post to measure just how big peer lending credit could become. Even after explosive growth this year, the p2p market is less than one percent the size of the $3 trillion consumer market.
Small business loans probably offer the most compelling market for peer lenders. Small business loans carry higher risk and can provide higher yields for investors. Lending through traditional banks has been limited through regulation under Dodd-Frank and Basel III, presenting an opportunity to alternative finance to pick up the slack.
The infrastructure to do appraisals and attachments will be needed but there is no reason that the industry will not eventually creep into the asset-backed market for motor vehicles and home mortgages as well. At $13.3 trillion, the home mortgage market dwarfs all others and would provide a new stream of borrowers once the space in other loans gets crowded. I would say asset-backed p2p loans are probably something for 2016 or beyond though.
Interest rates – I’ll be the first to admit that I’ve been surprised by the interest rate path over the last couple of years. Historic monetary programs by the Federal Reserve and other central banks have kept interest rates exceptionally low for longer than almost anyone thought possible.
Economic growth in the United States, though still slightly below what some would like to see, has begun to pick up. The nation added an average of more than 200,000 jobs every month this year and the moving average of initial unemployment claims has been below 300,000 since August. The recent plunge in energy prices should spark U.S. and global growth, the estimate is for a 0.5% boost to global growth for every $10 drop in oil prices.
While inflation continues to come in below expectations, there is no reason for historic levels of monetary stimulus through interest rates near zero. The market currently expects the Federal Reserve to start lifting its benchmark rate around the middle of 2015. This will cause rates on fixed income to increase and decrease the value of previously issued debt.
Peer loans may behave differently than other types of corporate debt when rates rise. Like high-yield loans, the p2p market is closely related to economic growth. With low unemployment and stronger growth, credit risk will come down for risky borrowers. This may all lead to slightly higher rates for the safest borrowers but lower rates at the risky-side of the scale.
Since peer loans are held to maturity, the increase in rates should not affect loan values though it is something that investors will need to think about when a secondary market forms.
Public offers – Lending Club raised nearly $1 billion in its IPO and was followed closely by $200 million raised by OnDeck Capital. This, along with record high stock markets and investor enthusiasm, will not go unnoticed by other peer lending platforms. Rising rates may increase market volatility towards the end of the year so I think we’ll see several platforms try to take advantage of the environment to issue shares, probably early in the year. Prosper would be the obvious pick but other mature platforms may also be likely to come to market, possibly Peerform or Orchard.
With any luck, we’ll also see some movement in passage of Title III of the JOBS Act this year, though I wouldn’t expect it until the second half. Rules by the Securities & Exchange Commission are more than two years late but few seem to care that regular investors are still locked out of one of the biggest developments in finance and investment in our nation’s history. Any sign that rules may be formalized will bring another boom in capital to the peer lending space as private equity positions itself to take advantage of a market that will grow ten-fold with non-accredited investors.
The growth in peer lending doesn’t look like it will slow in 2015, or even in the years following. I’m excited to be a part of the story and want to hear your thoughts. Use the comment section below to point out anything I missed or drop me a note. Check out my predictions for crowdfunding 2015 including more growth, a platform IPO and the potential for widespread platform failures!
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.