Peer-to-Peer Lending: The Leading Edge of Social Business

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Before Zappos and Dell.com thrived; before Pets.com and Beauty Jungle crashed; there was Amazon and eBay. These ecommerce pioneers weren't the first companies to conduct transactions online, but they were the first to take root and grow. Today we know the success stories, but in 1999 their future was hardly certain--while Borders was earning $92 million, eBay cleared just $10 million and Amazon bled $720 million. Ten years later, Borders lost $187 million and the two eCommerce giants earned a combined $3.3 billion.

A decade from now, perhaps we'll look back and speak of two social business pioneers, LendingClub and Prosper, in the same way we today speak of Amazon and eBay. One might argue peer-to-peer (P2P) commerce is nothing new; after all, eBay and Craigslist were both facilitating P2P transactions long ago, but these companies replaced and enhanced existing business models, such as classified advertising and flea markets, by bringing them into the digital age. Today, we see a new wave of social businesses creating forms of commerce that previously didn't exist outside of tiny transactions facilitated between friends and family members.

Never before have we seen scale brought to things like person-to-person lending (LendingClub and Prosper), car sharing (Wheelz and RelayRides) and space sharing (Airbnb). As in 1999, it can be difficult to see how these small companies might alter the world, but I believe these social businesses represent the next wave of change that will challenge traditional business models.

The primary P2P lending sites in the US are LendingClub and Prosper, and both are growing rapidly. Lending Club's 2011 loan volume more than doubled its 2010 totals, and Prosper is growing at a rate of 178% year-over-year. To learn more about the growth of peer-to-peer lending, I interviewed Peter Renton, who blogs at the Social Lending Network.

Renton notes that the strong growth of P2P lending is even more remarkable when you consider these businesses are not legal in all 50 states. "As laws stand right now it would be virtually impossible for any P2P lender to create a model that would please every state," notes Renton.

That may change with new action at the national level. A crowdfunding bill has passed the U.S. House and is gaining support in the Senate. This bill would not immediately make P2P lending legal throughout the US, but it is a step toward bringing P2P lending to every state. "I expect this will happen sometime in the next two to five years," says Renton.

One thing fueling the growth of P2P lending is the influx of institutional investors seeking better yields than they can get from other fixed income options. (Does this mean P2P lending is not really P2P?) "Prosper has received a $150 million commitment from a large institutional investor," notes Renton, "and Lending Club has seen massive growth in the last year in the institutional side of their business."

While investors are lining up, borrowers are not--at least not in large enough numbers to maximize growth for these two sites. Both P2P lending companies could be growing even more quickly if they could attract more borrowers. Renton notes, "There is plenty of money from investors and they continue to reinvest their payments, so there is always new money coming in. But borrowers have to be attracted one at a time."

All this growth in loan volume has not resulted in either company becoming profitable yet, but "Lending Club could be if they wanted--they are just focusing on growth for now," according to Renton. Both companies make most of their money from charging an origination fee of up to 5% for loans and a 1% service fee on all loan payments. With continued growth, Renton expects both sites will achieve profitability by the end of next year.

Will P2P sites someday challenge banks? Maybe, and that depends on what banks do. Even with the impressive growth, LendingClub and Prosper's loan volume is still tiny, Renton points out. "This month both companies combined will do less than $50 million in loan volume. They could do 100 times that and still not make a big dent in overall consumer lending."

Then again, growth like the P2P sites are experiencing demands attention. "If banks ignore it, then eventually they will see some erosion in their core business, but we are many, many years away from that," notes Renton. And, of course, banks could get a piece of the P2P lending action, if they wanted. "Nothing is stopping banks from entering the P2P lending space. In fact, I think when these sites start to get big, one of the leading banks will buy one or both companies."

Watching the growth of new social startups makes me want to party like it's 1999, but whether we will see Amazon-like growth over extended periods is uncertain. I would not discount, however, the level of change or pain that can come from today's nascent P2P lending sites and other new social businesses. As I like to point out, ecommerce represents less than five percent of total US retail, yet this small fraction is enough to undermine margins, threaten established companies and change consumer expectations and habits.

If you're curious about lending or borrowing in the P2P lending sites, Renton does a nice job of covering the business on his blog at http://www.sociallending.net/. Check it out!