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Wharton FinTech - P2P Lending Discussion
- 1. Wharton FinTech P2P Lending Discussion Club Meeting October 21, 2014
- 2. Agenda • News and announcements • P2P Lending • Lending Club KNOWLEDGE FOR ACTION
- 3. What is P2P Lending? Loan money to individuals (“peers”) through a simple online platform KNOWLEDGE FOR ACTION • Online platforms that connect institutional and retail investors to borrowers, cutting out traditional FIs • Use proprietary credit scoring and checking tools to establish APRs and offer term loans to borrowers • Borrowers typically use money to refinance credit card debt or pay off other obligations • Lenders can diversify their portfolio through P2P investments • Loans are unsecured and risk is borne solely by investors • Over $6.0B P2P loans issued to date LENDING
- 4. P2P Lending: Key Players Overview and market share Founding and total loans KNOWLEDGE FOR ACTION issued Borrower profile Minimum FICO Loan terms APR range Most common use of loan • Largest P2P lending platform • Market leader– own about 70% share of market • Second largest P2P lending player • About 30% share of market • Emerging competitor • Likely <1% market share • Opened to investors in 2007 • $5.0B in loans to date • First entrant into P2P lending; founded in 2006 • $2.0B in loans to date • Founded in 2012 • Likely about 5,000 loans funded to date • Has historically attracted higher-quality borrowers, with approval rates at ~10% • Initially catered to more sub-prime borrowers; suffered a 22% total charge-off rate in 2010 • Targeted towards younger borrowers with less established credit histories • 660 • 640 (imposed after high post-recession charge offs) • 640, but do accept insufficient credit information • 3 and 5 year terms • 3 and 5 year terms • 3 year term • 6.78 – 29.99% • 6.73 – 35.36% • 6 – 24.60% • Credit card debt • Credit card debt consolidation / refinancing consolidation / refinancing • Credit card debt consolidation / refinancing
- 5. The P2P Business Model Lending Club, and other P2P platforms, make money off two key revenue streams: loan origination fees and payments made to investors • 1% - 5% of the borrowed principal • Depends on risk assessment and borrowers’ creditworthiness KNOWLEDGE FOR ACTION 1 2 Loan origination fee from borrowers Ongoing payments to investors $10,000 loan with 3% origination fee $300 • 0.5% - 1% of all payments made to investors • “Service fee” is assessed from both interest and principal $10,000 loan at a 15% interest rate $3.5 / month
- 6. Agenda • News and announcements • P2P Lending • Lending Club KNOWLEDGE FOR ACTION
- 7. Lending Club: Overview Lending Club is the market leader in P2P lending, showing rapid growth in loan issuance over the past five years KNOWLEDGE FOR ACTION
- 8. Lending Club: Default Rates Default rates have recently averaged around 3%, but also vary widely depending on the loan rating 2012 default rates, by loan type KNOWLEDGE FOR ACTION
- 9. Lending Club: Portfolio Landing Page KNOWLEDGE FOR ACTION
- 10. Lending Club: Investing KNOWLEDGE FOR ACTION
- 11. Lending Club: Borrower Profile KNOWLEDGE FOR ACTION
- 12. P2P Lending: Impact KNOWLEDGE FOR ACTION 1 2 3 • Rapidly growing space that’s attracting huge numbers of institutional and individual investors • Ripple effects into student loans, small business loans, possibly auto + home loans • Disintermediation of traditional lenders – big banks, credit unions and other financial institutions • How will they react? • It’s becoming immensely profitable for the first-movers • Lending Club IPO announced – currently valued at $4B, likely will approach ~$6B at time of IPO
- 13. Investment Evaluation Should you invest? Opportunities Risks KNOWLEDGE FOR ACTION • Loans are not collateralized – should a borrower run into financial trouble, a P2P loan is probably last in line for repayment • Loan performance is incredibly volatile and subject to overall economic conditions • Great Recession default rates were in the 10% - 20% range • Unregulated space that can be negatively impacted by future financial regulation • A new asset class that can be an easy way to diversify your investment portfolio • Recent returns have been positive • 5% - 8.5% depending on investment grade • Opportunity to cherry-pick investments • Social impact – e.g. help others get out of credit card debt
- 14. Questions @whartonfintech Wharton FinTech Wharton FinTech whartonfintech.org KNOWLEDGE FOR ACTION