Peer-to-peer lenders such as Lending Club are creating secondary markets for trading loans they make. Although early in inception, such efforts point to the ability of new entrants to disrupt traditional market dynamics.
On 14 October 2008, Lending Club, an online peer-to-peer (P2P) social lending network, completed its U.S. Securities and Exchange Commission (SEC) registration process and opened its Web site to new lenders. This registration enables a secondary P2P loan market, offering enhanced liquidity options for the lenders.
Online P2P lending financial social networks (FSNs) have introduced another competitive force into the financial services market, this time in investment services. Lending Club's SEC registration creates a tradable market for these loans.
Lending Club now provides access to an SEC-regulated alternative trading system (ATS) managed by FolioFN, a registered broker-dealer. Only loans originated since the registration are eligible for trading. However, Lending Club says it is developing a plan to convert older loans to new instruments that will meet the trading criteria.
This new marketplace is important for two reasons:
A secondary market for these loans enhances the liquidity of a lender's investment. Previously, a lender was required to tie up funds for the three-year life of the loan, with repayment on a fixed monthly schedule. Now, a lender with immediate needs can (at a market price) liquidate the investment via the trading market.
While SEC registration began before the current credit crisis expanded, the move toward a regulated market for less traditional investment instruments presages the eventual direction for derivatives traded over the counter (OTC). The ability of a small startup such as Lending Club to develop a regulated market for illiquid instruments (albeit on a small scale) puts additional pressure on larger banks to rapidly establish exchanges for what are currently OTC instruments.
Prosper Marketplace, another P2P lender, began a similar registration process on 15 October 2008, indicating further growth potential for trading P2P loans. With large and small investors seeking increased transparency and liquidity, banks must monitor these efforts for opportunities and threats.
Competition increasingly comes from unexpected directions. Develop competitive intelligence processes that look beyond traditional geographic and industry boundaries.
Expect FSNs to continue to expand their services to both borrowers and lenders, as well as their distribution networks. Consider partnering with FSNs to improve their distribution capability and meet investor demand for more transparent investment vehicles.
Examine the registration processes of Lending Club and Prosper Marketplace, and look for lessons in how to achieve greater speed and efficiencies in new business efforts.
"Virgin USA Buys CircleLending: How Should Banks Respond?” — Market disruption will occur only when FSNs extend their offerings from individual networks to interconnected ones. By David Furlonger and others
"Social Lending Will Challenge Bank Customer Relationships” — Nonbank FSN platforms are replacing banks as intermediaries in the borrower and lender supply chain. By David Furlonger
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