Peer-to-peer lending failed
Lending Club was founded on the idea of bringing individual borrowers and lenders together. Those days are now officially over.
Why it matters: The peer-to-peer dream was that Americans could deal directly with each other, rather than having to go through hated banks.
- Lending Club was the foremost avatar of that dream. But the company soon realized that it was a lot easier to borrow money from hedge funds, or the market, than it was to provide the ability for people to make tiny loans to hundreds of different borrowers.
- Individual lenders wanted higher returns, too. If Lending Club wanted the lowest borrowing costs for its borrowers, it had to move to wholesale funding.
Eventually, Lending Club decided it should just become a bank — so it announced the acquisition of Radius Bank in February.
- Banks intermediate between borrowers and lenders. If you lend to an FDIC-insured bank like Radius, you take no credit risk, and let the bank worry about what happens if borrowers default. (Lending to a bank and keeping money on deposit at a bank are ultimately the same thing.)
- It's the exact opposite of the peer-to-peer model, which was built on the idea that individuals are more likely to repay other individuals than they are to repay a faceless financial institution. If that was ever true, it isn't any longer.
The bottom line: Peer-to-peer lending failed. When Lending Club went public in 2014, it was worth more than $9 billion. Today, it's worth just $350 million.