Peer-to-peer (“P2P”) lending started about a decade ago to allow individuals and other small investors to lend money to each other over the internet. By going P2P, banks were cut out of the process, resulting usually in lower interest rates and more funds available for the small businesses looking for cash. In return, individual investors earned single-digit returns, which were often higher than what they could have earned elsewhere in the market. As envisioned, it was a true win-win: a way for individual investors to make a local, real-world impact while also making some money.
However, yesterday the New York Times reported that the P2P industry has been infiltrated by the very institutions it was designed to shut out. Today, major financial institutions have invaded the space and are using their massive resources and sophisticated technologies to suck up the best deals.
But is their presence necessarily bad? Maybe not. These institutions respond by pointing to the benefits of scale. They claim they are providing much-needed scale to the market — that is, making more funds available, with faster deal close times and more transparency, than would otherwise be possible in a market of individuals. On the other hand, the defenders of classic P2P claim the massive Wall St. presence makes the P2P market have less “resonance with the public.” It also makes the P2P market less stable, they say. In short, critics claim, P2P is now a different animal entirely — more akin to “online consumer finance.”
In any event, it’s an interesting article that discusses the P2P industry, its players, and how it’s changing. It also discusses how small investors are trying to claw their way back into the P2P game. You can find the article here.