Should US Banks get involved in the P2P sector?

After half a decade of low interest rates, and low yields, banks are starting to see the appeal of the peer-to-peer market, and the investment opportunity it represents. In the current economic environment banks are struggling to deploy capital in markets that provide them with even a half-decent yield. The search for yield has been widely documented, and investors are looking to riskier products in the hunt for more attractive returns.

Banks have money to put to work and the peer-to-peer sector represents an intriguing opportunity. They are using this sector to diversify their portfolios away from the more traditional fixed income space.

Many within the peer-to-peer lending industry are highly optimistic about the partnership of banks and peer-to-peer lenders.

“This is one of the most disruptive occurrences in the banking and lending industry for decades.

“Marrying equity crowdfunding with traditional bank financing - is a recipe for ultimate success for everyone involved including the average American investor.”

Kim Kaselionis, founder of Breakaway Funding

“Clients [are referred] through partnerships with P2P and crowdfund platforms, and obtain client satisfaction, retain the client and potentially the funds loans and gain a broader customer base. So the borrower wins, the crowdfund and P2P platforms win and the banks win.”

Andrea Downs, Founder of Coastal Shows and the CFGE of Crowdfund Banking and Lending Summit

“Bank participation with peer lenders combines low operation costs of marketplaces with low costs of capital at banks.”

Renaud Laplanche, CEO of LendingClub

Significantly, more platforms are starting to partner up with banks for particular projects – a movement which is driving the industry into the mainstream. In September CircleBack Lending joined forces with Jefferies to facilitate the sale and securitization of up to $500 million in loans. This came after the landmark rating of one of SoFi’s securitisations by S&P back in July.

Further to these emerging partnerships, it was recently announced that one of the US’ biggest peer-to-peer lenders, Lending Club, is referring potential borrowers who do not meet its credit criteria to OneMain Financial. Of particular note here is that OneMain is taking on loans that are deemed too risky for Lending Club to cover. This sharing of customers is something that we’re likely to see more of in the future. Some have suggest that the supposed backbone of the market – the retail investor – is being pushed to the sidelines as a result of such institutional partnerships. Professional investors now back about 80% of the loans on Lending Club and Prosper, the 2 largest US platforms.

Underlying the peer-to-peer market is an element of systemic risk. Bill Dallas, CEO of NewLeaf Lending in California, sees P2P lending as a threat to his business and a threat to financial stability. This risk could be overinflated by the presence of big banks, pumping capital into what some deem to be a vulnerable marketplace. The fragmented regulation of the industry and the lack of long term data on default rates in the marketplace suggest that a note of caution should be sounded before hailing peer to peer as a silver bullet in the low yield economy.

The peer-to-peer sector is yet to be tested through a full credit cycle. The industry obviously carries many risks and it could take a battering during a downturn. This makes some institutional investors nervous and some are actively campaigning against this insurgent sector.

Overall, it is seemingly very positive that banks are getting involved in P2P. The injection of liquidity has helped fuel the evolution and development of the peer-to-peer sector. This interest has helped push the entrepreneurial zeal of platforms, hastening the development of new models. It will be interesting to follow the development and depth of commercial bank involvement and what their next moves will be in regard to this insurgent sector - especially after interest rates and yields rise.