Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

It turns out that lovebirds aren't entirely stupid.

Yes, they often spend too much on their weddings. But they aren't as profligate with their bridal expenses as some bankers would like.

If they were, perhaps Promise Financial would still be making loans to finance wedding dresses and cakes and bad DJ's. This relatively young firm was offering to make unsecured loans of around $10,000, typically for weddings, and charged interest rates that went up to nearly 30 percent.

But it stopped making loans at the end of January, according to a Bloomberg News article on Friday by Matt Scully. Instead, it's changed its name to DigiFi and will provide technology to bigger banks.

You can draw several conclusions from this development.

First, it should bolster your faith in humanity that people are reluctant to mortgage their futures to pay for one night of knockout hair and makeup. Newlyweds are entitled to a night of celebration. But it seems a bit ludicrous to pay up to 30 percent rates on money (10 times the 3 percent rates on 30-year U.S. government debt) to buy an extra round of drinks and nice party favors.

And second, it makes more sense for many smaller online lenders to team up with larger financial operations rather than try to go it alone in an unforgiving and complex world.

Digital Debt
U.S. consumers have been borrowing more money using online lending systems
Source: Orchard Platform, Moody's Investors Service

The founders of Promise Financial, Josh Jersey and Bradley Vanderstarren, recognized that, telling Bloomberg News, "Traditional financial institutions like banks are better suited to be digital lenders because they have a lower cost of capital and longer-standing relationships with borrowers."

This is yet another sign of the slow abandonment of the original vision of peer-to-peer lending in the U.S., where individuals lend to one another in a decentralized, Internet-based platform. The largest online lending firms, such as LendingClub and Prosper Marketplace, finance loans through securitizations, money from institutional investors and banking relationships. Promise, for example, raised around $100 million of funding agreements from investors including Greg Lippmann, a legendary mortgage-debt trader.

Heading Up
Securitizations backed by online consumer loans have been getting more popular
Source: PeerIQ
2017 data is the highest end of an estimate by PeerIQ; the range was $6.3 billion to $11.2 billion

As Moody's Investors Service wrote in a March 16 report, "In the U.S., P2P lending, which was a prevalent model in the early days of marketplace lending, is becoming less common."

Falling Fortune
LendingClub has fallen as the quality of its loans deteriorated faster than expected
Source: Bloomberg

But the more traditional these newer, more tech-savvy lenders become, the more they need to distinguish how they differ from large, established banks. And they're doing so at a time when many larger financial institutions are trying to break into the computerized lending business. For example, SunTrust Bank has its LightStream platform and Goldman Sachs recently launched its Marcus online consumer lending system.

These larger financial firms have the upper hand at this point. Promise is trying to do something that makes sense: work to modernize the way big banks lend. Peer-to-peer lending won't be the revolution its champions trumpeted, but it can play a big role in the evolution of banking.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net