Peer-to-peer lending is growing up, and Wall Street is looking for a bigger piece of the action.
The burgeoning business, also known as marketplace lending, involves private loans between lenders and borrowers, usually arranged through websites such as Prosper, Lending Club and SoFi, along with a growing array of other entrants to the field. Investors like the loans for the yield they provide, and individuals and business people enjoy the ease of going to a site and being able to procure funding relatively quickly.
But as the industry is growing, so are its funding needs. That's where big Wall Street banks are stepping in.
P2P platforms increasingly are bundling loans together and selling them off to institutional investors as "asset-backed securities."
If that term is familiar, it's because the practice was at the center of the financial crisis, where Wall Street combined loans — often mortgages — into exotic packages and then shipped them off to yield-hungry investors. They became an ugly symbol of the worst economic downturn since the Great Depression, but asset-backed securities (ABS) never went away, and the instrument, part of an industry practice known as securitization, is now proving valuable for the P2P industry.
Total ABS issuance for 2016 in peer lending came to $7.62 billion, according to S&P Global Market Intelligence analyst Eric Turner. In the grand scheme of things, the figure doesn't sound like much for a banking industry that has $16 trillion in total assets.
However, the practice of ABS issuance in the marketplace lending arena began only around 2013, when the total was a meager $257.1 million. That means issuance is about 30 times what it was just four years ago. The 2016 total also represented a 72.4 percent increase over the previous year.
As the industry expands, so will loan securitization.
"As the market has proven resilient in the face of headwinds, the use of securitization is unlikely to slow down, and 2017 stands to be another record year for deals in the space," Turner said in a research note. "The continued need for capital at (traditional) lenders, coupled with the entry of new lenders in the space, will help fuel increased offerings for the year."