How A Trillion-Dollar Market Remains Hidden In Plain Sight
Editor’s note: Charles Moldow is a general partner at Foundation Capital and an investor in Lending Club, Motif Investing, AdRoll, DogVacay, Lending Home and OnDeck.
Remember the hidden cash craze this summer? Someone was hiding money all over cities, leaving people to find it on their own. It got a lot of attention early on and got me thinking that there is a lot more out there than random $50 bills and whatnot. As an investor, we look for huge markets that either have remained hidden or are just starting to be explored. Financial marketplaces is one of these.
The first efforts in this space were called peer-to-peer (P2P) lending, and rightly so. It was literally individuals posting descriptions of things they needed loans for (a new deck, cosmetic surgery) and other individuals offering to loan them the money for those things, at various rates. With no banks involved, it was truly disintermediated lending. There was no underwriting rigor – because there was no underwriting, period. It was the Wild West, and about half of those loans failed.
Today, more sophisticated, more professional operations have grown up, and these lenders are not truly peer-to-peer, because the money used to fund their loans comes from a diversified set of investors, not just individuals. They’re not truly disintermediated either because the best platforms provide some form of intermediation (like scoring borrower quality). That’s why I’ve taken to calling them “marketplace lenders.” These new platforms are able to create a marketplace where lenders and borrowers can find one another and agree to terms, all without the involvement of retail banks or credit card companies.
Why does this matter? Because by removing traditional banks as the middleman, marketplace lenders can use their spread advantage to offer lower rates to borrowers and better returns to lenders. Borrowers on marketplace platforms pay closer to 10% interest, a third less than the average of what is paid to banks or credit card companies. And instead of receiving 1% interest for keeping their money in a CD, active lenders on marketplace platforms receive, on average, an 8% return on their investments.
I believe marketplace lending will increasingly encroach upon – and take market share from – traditional banking. I believe this will happen across lending (consumer, real estate, SMB, purchase finance), payments, insurance, equity and beyond.
But the first domino to fall is one that’s already falling, and that’s consumer loans.
Earlier this year my whitepaper on marketplace lending forecast that the sector has the potential to originate $1T in loans globally by 2025.
What does that mean? At 5% of originations, marketplace lending would create $50B in annual revenues and create $75B in consumer surplus for marketplace lenders and borrowers (money that would otherwise go to Too Big to Fail Banks). That’s about 0.3% of GDP back to consumers in the form of better rates and service.
And all this is made possible by the online marketplace – the same catalyst that fueled the rise of Internet marketplace pioneers like eBay, and more recent marketplace business models like Uber and Airbnb. The marketplace lenders who succeed – and who ultimately remake the banking industry – will be the ones that create robust, two-sided marketplaces.
Creating those marketplaces won’t be easy, but there are several companies that are already well on their way. Finding them, too, hardly takes a scavenger hunt – unlike your bank’s loan officer, they’re just a click away.
Image via Shutterstock user Oleg Doroshin