I love how financing innovations eventually hit the slow adopters. Traditional investment banks are joining the crowded, but not overly-crowded fray of P2P lending and crowdfunding. It was only a matter of time. As always, when markets begin to get of any reputable or threatening size, the big boys will either build or buy their own version. The question is, how long it be before some of the nation’s biggest financiers become name-brands in the industry? What will be the impact of this shift from a nascent market into maturity and how will existing portals and consultants in crowdfunding adapt? Here we’ll discuss some of the various changes traditional banking is likely to bring to the crowdfunding/p2p/crowd lending market and what that means for the future.
Financial Engineering at Its Best
The sad difference between the traditional and the new is that once Wall Street comes on board, they’ll add their own twist, which often is not necessarily the best bet. When we start to talk about securitising the loans bundled from p2p and crowdfunding portals, it has a couple of benefits. For one, the original lenders get a return on their investment much more quickly than originally anticipated. What’s even more interesting is that many institutional investors are actually replacing many of the peers doing the lending on sites like LendingClub. The FT has given us insight into the intent traditional banking on this market:
“Everyone is looking for new asset classes where they see a scaleable opportunity that can be securitised, as well as a yield play,” says Manish Kapoor of West Wheelock Capital…
For many of them, the attraction of P2Ps can be summed up in one word: returns. At a time when two-year US Treasuries offer yields of just 59 basis points, investing in 15-month P2P loans can net investors double digit percentage point returns.
Investors are seeking loan opportunities where there is short duration combined with high yield. It’s combining the liquidity premium with a higher return. It’s essentially the best of both worlds from an investment perspective. With investors chasing returns, institutional money will find its way in. And when it does some of the spurned methods instituted in other markets will become part of the p2p and crowdfunding market. This has its positives, but there are always downsides.
Muhammad Yunus, the founder of microfinance was quick to blast those who went after the microlending market to strictly profit from the poor by providing loans. It was essentially nothing more than payday loans repackaged using a different name. Large microcredit loans were bundled, securitised and sold on Wall Street. The sellers of such products made out like bandits, but it left a taint on the industry.
When institutions’ money is being used true democratization is nowhere to be found. I’m expecting institutions will even be more directly involved in the crowd lending market when it comes to business finance, rather than simply personal loans. It’s even tougher to democratize capital when the size of the loans are much larger than a $2,000 loan to a friend for a specific personal need or project. True debt crowdfunding for business will include loan sizes and capital raises that are much larger than your typical peer-to-peer plays. In effect, they’ll require greater inputs. A large investor base will help, but it’s much easier to report to less than five investors than 1,000+.
The question I have is, when will the traditional banking/financing market feel they’re being threatened by the crowd-lending and peer-to-peer lending portals? If this occurs, I expect to see more encroachment, partnership and eventual M&A across the sector. Distinguishing between the two in 20 years, will likely be impossible as crowdfunding, crowd-lending and peer-to-peer will be another tool in the toolkit of many a traditional bank or bank subsidiary.
What do you think? Do you think traditional banking will eventually wholeheartedly embrace the crowd? If only in hybrid form, what will the outcome look like?