Scarcity and Rates: Peer to Peer Lending in 2014 and 2015

2013 was a big, big year in P2PLending. It became mainstream and more known and recognized as a plausible asset class for investment and analysis, as well as just increased general exposure to the public.  2014 and 2015 are likely to be growing yet transitional years in peer to peer lending, especially for those of us who look at it strictly for investment purposes. Let's look at one thing that has already happened and 2 of the most likely things to happen during this growing but transitional period.  The likely to happens are my opinion only.....

What's Already Happened: Wells Fargo

Our friends at Wells Fargo have acknowledged Lending Club as a competitor (SFGate.com), and as a result have chosen to ban their staff from investing in peer to peer loans. CNBC covered the story here. Wells has decided that it is a conflict of interest for their employees to invest in these loans.

There is no greater sign of mass acceptance and bigtime exposure than when a much larger company considers you a competitor. Wells acknowledgement of this is a clear sign of the positive action of both Lending Club specifically and peer to peer lending generally.

What Will Likely Happen: Greater Scarcity of Loans

More institutions and more individuals are coming into the market. In fact just last week, Prosper had exactly 4 new loans added in just one day that weren't already purchased and today has only 19 loans in total available for purchase.

Source: Prosper.com
Source: Prosper.com

 

This trend will only continue as the market becomes even more mainstream and even more popular. Money is pouring into this market looking for yield now that its perceived risks are much lower than previously thought by many.  This is the new normal and is something we need to get used to moving forward unless the platforms decide to open up to some lesser credits at higher rates with increased risks. The opening up of the platforms is possible, but in my view unlikely, as trust in the marketplace and the platforms is an important part of peer to peer lending.

What Will Happen: Rates Will Come Down

As the demand for loans continues to outstrip supply, the inevitable longer term conclusion is that rates will come down. As an investor, this is a bad thing but overall for the market it's a good thing. Many of the high yield seekers will exit when rates come down but there will still be above typical market yields to be gained over time on these loans as an investment.  More of an equilibrium (in the economic sense)  will take place between supply and demand for loans and greater loan choice, albeit at lower rates will become available to us investors.  Long term this is a good thing as the lowering of rates will prevent a bubble like we've seen in the stock market and real estate markets in the last recession.

Conclusion

Thanks to a number of elements including the recent announcement by Wells Fargo, p2p lending is more mainstream than ever. Thanks to the increased interest in this type of investment and increased dollars coming in, loans will continue to be relatively scarce and rates will eventually come down.  Early adopters like us should continue to enjoy good rates on the loans we have and what we buy in the near future but it seems inevitable to me that rates, and therefore returns, will come down in the long term for us investors.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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