Peer-to-Peer Lending

Peer-to-peer lending companies promised to revolutionize banking by stripping it down to basics — connecting people who needed money with people who had it to invest. They’d give mom-and-pop savers the kind of returns formerly enjoyed only by banks, and offer mom-and-pop borrowers broader access to credit at better rates. Their pioneering data-crunching capabilities would make the whole system safer, and they’d get rich in the process. That’s not quite what happened. P2P, as the field is known, may turn out to be more of a niche business, bundling high-risk, high-interest consumer loans into bonds bought by hedge funds and other big investors. The question is whether P2P’s success in offering credit to those not helped by traditional banks will sink under the weight of higher-than-expected defaults on mostly unsecured loans taken out by borrowers who weren’t vetted the old-fashioned way.

In the U.S., what was a fast-growing peer-to-peer field has stumbled: Loan originations tripled to $36 billion in 2015 from the year before but then fell in 2016. Lending Club Corp., the best known P2P company and the first to go public, roiled markets when it announced that it had altered dates on loans sold to investors and asked its founder and CEO to step down. In March, defaults on personal loans made by Social Finance Inc., known as SoFi, reached levels that set off warnings for investors who bought bonds backed by the loans. One pioneer in the field, Circle Back Lending Inc., stopped making new loans as growing numbers of its borrowers defaulted. Last year, the U.S. Treasury Department released a report calling for increased disclosure and oversight for peer-to-peer lenders. More than $72 billion in loans were originated by peer-to-peer firms in the U.S., U.K., the European Union, Australia and New Zealand last year, according to AltFi. In China, loan originations in 2015 were estimated at $101 billion. But the government introduced tighter new regulations there last year after investors lost $7.6 billion in a peer-to-peer lending Ponzi scheme.