Institutional investors are tripping over themselves to buy so-called peer-to-peer loans offered by a new breed of internet lending companies, a development that could transform the nascent sector into significant player in the credit markets.
P2P lending started in 2006 with the founding of Lending Club and Prosper Marketplace.
The loans often have interest rates low enough to make them a feasible way for individuals to pay off high-cost credit card debt, yet the returns to investors are attractive compared to other fixed-income assets.
These developments have caught the eye of hedge funds, endowments, pension funds and insurers who want to put hundreds of millions of dollars to work.
The influx of institutional money is enabling online lenders to offer far more loans and compete more directly with traditional banks. Loan originations are growing at about 300% a year, according to analyst estimates.
But the arrival of Wall Street investors also brings new risks. Sharp changes in interest rates or an economic slump could prompt the new money to depart as quickly as it arrived.
Borrowers fill out loan applications and post requests on their websites. Investors commit to fund the loans, then Utah-based bank WebBank makes the loans, sells them to Lending Club and Prosper, which in turn sell them on to the investors in the form of a note. The companies make money from servicing and origination fees.
The industry is on course to make about $3 billion in loans this year. But the market opportunity is $85 billion.