Peer-to-peer lending: Coming soon to a bank near you?
Imagine the New York City taxi commission sponsoring the next cohort of Uber drivers. That’s the rough equivalent to what happened this week in Israel when Bank Leumi announced it will soon launch a peer-to-peer (P2P) lending service.
Retail banks worldwide have cast a wary eye on P2P lending since sector pioneers Prosper and Lending Club - which went public on the NYSE last year - demonstrated the huge potential of the market. P2P lending remains a small sliver of the overall consumer debt market, but it’s growing fast, and consumers borrowing through more convenient online services could eventually threaten the very heart of traditional retail banking.
Large American banks have already participated in funding online lenders and Citi recently announced it will partner with Lending Club for a batch of loans to a lower income clientele, but this appears to be the first planned launch of an entire new P2P service from a bank with international stature.
The move from Leumi, the second largest bank in Israel, comes as new Finance Minister Moshe Kahlon begins to implement reforms aimed at increasing competition among Israeli banks and credit card providers. Anticipating this incoming regulatory wave, Leumi already announced plans to start an Internet-only bank under another brand, and it now appears willing to cannibalize a portion of its own consumer lending business through the new P2P initiative.
Like Prosper and Lending Club, Leumi would receive a small fee from each P2P loan it facilitates, and it can provide underwriting and an informed debt rating on existing customers. But it may have its eyes on a bigger prize.
Prosper and Lending Club really took off when hedge funds and other institutional investors began gobbling up the higher interest consumer loans they generate. At this point, institutions provide the majority of the more than $3 billion in loans on Prosper and Lending Club. It’s reached the stage where these services are really no longer truly defined by being “peer-to-peer” - they’re just a new, more convenient and inclusive framework for initiating consumer loans.
Following this script, if its P2P venture succeeds Leumi could itself have first access to the new, more lucrative loans it attracts from subprime borrowers. And it can get ahead of a trend that seems to be gaining real traction everywhere.
Globes reports that Leumi may even offer the technology behind its forthcoming P2P marketplace to other banks worldwide. Call it LCaaS (Lending Club as a Service) - coming soon to your local bank?