The biggest peer-to-peer lenders have been forced to install “speed bumps” to stop sophisticated investors from snapping up the most attractive loans.
P2P lending was conceived to directly connect borrowers with individual lenders, bypassing banks. But the sector has rapidly evolved as institutions such as hedge funds and other large investment companies went to great lengths to get their hands on the best loans – to the extent that now, more than 60 per cent of the industry’s loans are purchased by institutions.
Lending Club and Prosper, two of the largest operators of P2P loan platforms, are now tackling the growing institutional interest.
“There was a little bit of an imbalance that caught us by surprise last year,” Renaud Laplanche, chief executive of Lending Club, said in an interview. Since it started offering loans seven years ago, the average time most new loans on Lending Club sit on the platform before getting purchased has dropped from days to seconds.
Lending Club has placed limits on the amount of loans investors can purchase and has also installed new technology that is intended to allow individual investors time to scan the site and give them a chance to compete for loans. The most sophisticated investors use computer programmes to plug directly into the company’s platform and rapidly evaluate the best loans available.
Late last year, Prosper installed speed limits to deter trading firms from buying up its loans unfairly by using multiple servers and rapid-fire computer software.
Investors seeking to buy loans from Prosper are now limited to a maximum number of server hits per second and institutional investors are confined to buying “whole loans” instead of the smaller pieces of loans intended for retail investors.
Both Prosper and Lending Club, which is planning an initial public offering for later this year, are attempting to walk a fine line between satisfying the appetite of retail investors and tapping into demand from institutional investors who can help them expand their businesses enough to be profitable. The growth of the two US businesses contrasts with how other sites such as Zopa, a UK-based P2P lender that counts retail investors as its biggest loan buyers, have evolved.
A report released last week by the International Organisation of Securities Commissions (Iosco), the umbrella body for global market regulators, warned that while the global P2P industry, with $2.8bn of loan originations last year, was as yet too small to pose a threat to financial stability it did “raise significant investor protection issues, particularly in relation to retail investors”.
Big investors may be seeking large amounts of loans in order to bundle them into securitised bonds which can then be evaluated by credit rating agencies and sold to even more investors. Last year, Eaglewood Capital, a New York-based investment firm, created the first P2P securitisation, which was unrated.
Securitising P2P loans “will increase the complexity and interconnectedness with the broader financial market”, Iosco warned in its report.
“Some investors that have high-frequency trading backgrounds started to manipulate the game in their favour,” said Matt Burton, who is developing a secondary trading market for P2P loans called Orchard.
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