Less than a decade ago, individual investors piled into the peer-to-peer lending industry with an idealistic belief that Silicon Valley could form a better banking model than Wall Street. In recent years, that picture has changed substantially.
Money from large investment firms account for the lion’s share of online financing—so much so that people operating within the space increasingly refer to this industry as marketplace lending rather than peer-to-peer lending. The biggest online marketplaces, including LendingClub and Prosper, are increasingly focused on compliance and lending standards rather than just user-friendly interfaces, according to Peter Renton, publisher of Lend Academy.
Now this evolving online lending landscape is reaching back out to individuals, only with a Wall Street twist by providing them access to funds that use leverage and charge relatively big fees. After all, it turns out that many moms and pops aren’t much interested in investing directly in these loans or brokering them among one another.
The latest example of this effort to make it easier for anyone to slip into this industry is a new closed-end fund that may start trading soon. The Van Eck Overland Online Finance Trust “may invest in a broad range of online-sourced loans,” including consumer, small business, student, real estate and other loans, according to a prospectus dated September 28.
The creation of this fund shows how big firms are trying to get individuals to pour their money into a field that’s going through some growing pains after years of rapid growth. Closed-end funds typically use leverage to bolster returns. They lock up investor money for a long time, allowing fund managers to invest in less-traded assets to generate bigger dividends for shareholders.
Why the pitch to mom and pop now? Well, perhaps because big money managers have tempered their interest in the industry and online lenders need a more diverse pool of investors. Prosper, for example, is making a concerted effort to attract smaller investors, hoping they’ll account for about one-third of its loans by the end of this year. LendingClub’s investors started to withdraw cash this year for the first time in its history.
Meanwhile, banks and hedge funds slowed their investments earlier this year as LendingClub’s founder, Renaud Laplanche, resigned unexpectedly and some online loans experienced higher-than-expected levels of delinquencies. The lending marketplaces are now trying to attract a greater number of retail investors, including some who may not be as familiar with the industry and are seeking bigger returns in an era of near-record low bond yields.
But peer-to-peer lending is morphing into something that looks a lot more like traditional Wall Street banking, just conducted online. Many more individual investors may enter the picture, but they’ll most likely do so through well-recognized investment vehicles, such as mutual funds or exchange-traded funds, rather than as direct investments. The online banking revolution has been downgraded to an evolution.