I, for one, was not that surprised with the news yesterday that Virgin Group has taken a stake – a majority one – in Circle Lending. It was only a matter of time before someone with real money decided to get into the P2P game.
Why is that?
For various conference and research purposes I’ve spent quite a bit of time (as have most of my colleagues in the blogosphere, no doubt) looking at the available numbers for the P2P game. Most of that data comes from Prosper, which is a little bit different to Circle Lending, but nonetheless is a decent player in the space. Look at the data and you see several things.
Firstly, interest in P2P is growing rapidly. Zopa in the UK have just passed 150,000 members, and Prosper is many times that. And the Prosper traffic spike the other day shows just how big things are getting in the space. But despite all that traffic, there is a pretty big thing sticking in the side of the P2P players: a lot of the loans aren’t being funded. I just logged into Zopa, and I can see quite a few quality borrowers that have been sitting around waiting for quite a while now. The situation is pretty much the same on Prosper.
The second thing that’s obvious from the data is that whilst interest is growing rapidly, and there is a concomitant increase in originations, the mean value of each loan is pretty much stuck. I don’t have the data for Zopa, but for Prosper, the last time I checked, the average size of a loan was about $7000USD. That’s important because all the P2P players make money through fee income, usually an opening or closing cost calculated as a percentage of the loan value. So with loan values stuck at a relatively low level, you have to write a lot of loans to be profitable. There’s probably not enough lenders presently in the market to make that profitable right now.
On the other hand, you could get the loan value up, which would make your business more profitable, but would mean you have to do more complicated transactions, including secured loans like mortgages. I’ve argued for some time that the P2P market must be heading here, and that, probably, only a bank would get there. In comes Virgin who have cleverly acquired a technology (if not a user-base) that they can back with real money to hit the secured market. I was fascinated that Virgin Group specifically stated that they’d be going after this market in their announcement.
What is the wake up call that we, as banks, must face? Namely this one: if Virgin make Circle Lending a success, and they persist the pure P2P model, the incomes streams associated with lending are going to tilt away from interest margin. Fee income will rule the day, and non-bank players have a much better time of fees with their customers than banks do.