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Crowdfunding (aka P2P Lending): The First Pure Internet-Induced Disruption in Financial Services

By Jim Bruene on January 10, 2013 5:46 PM | Comments (1)

image I am an unabashed fan of peer-to-peer (P2P) finance (see notes 1, 2). In theory, it makes so much sense to tap Internet efficiencies to match the buyers and sellers of money. On the other hand, there are good reasons to have highly regulated intermediaries, although that system is far from perfect as well.  So, I'm looking forward to the hybrids we'll be seeing in the next few decades.

Back to the present day. In the last 12 years of writing Online Banking Report, only two product launches have made me stop what I was doing and immediately start writing a new report:

  • PayPal's launch of P2P payments in 1999 (OBR 54)
  • Prosper's launch of P2P lending in 2006 (OBR 127; note 3)

And I believe P2P lending is way more disruptive than what PayPal has done. PayPal introduced a vastly improved front-end to bank checking accounts and credit cards. The company created an extremely valuable franchise (note 4), but the banking system is still intimately involved in most transactions. PayPal stole revenues from acquirers and held a few deposits, but for the most part, had little impact on card issuers.

That's competition.

However, Prosper, Zopa, Lending Club and the other P2P lending pioneers created virtual banks (taking in deposits and lending the money out) completely separate from existing financial institutions.

That's disruption.

And it's about to get way more interesting as the concept takes off in the business financing/investing arena via what's been called "crowdfunding" (note 5).

Bottom line: If you are a bank, learn to love crowdfunding and P2P. It's disruptive, yes, but you can harness it to both help those who don't qualify under your existing underwriting and increase your bottom line (note 6).


Graphic: One of more than 50 books for sale at Amazon about Crowdfunding and  Kickstarter.
1. Unfortunately, I've backed only one loan so far, earning a nice return on my $100 loan in 2006.
2. We have published three reports in this area (OBR 127 in 2006, 148/149 in 2007, and SR-5 in 2009). We are working on our fourth. It will focus more on equity and debt crowdfunding for small and mid-sized businesses.
3. Zopa 2005 launch in the United Kingdom beat Prosper to market by almost a year.
4. eBay's market cap is $60 billion, of which a significant chunk is attributed to PayPal.
5. There are hundreds of companies entering this space. We are most familiar with two Finovate alums involved in debt-based crowdfunding (SoMoLend and Rebirth Financial). And we've written about equity-crowdfunder CircleUp, which was also featured in the NY Times along with SoMoLend this week.     
6. Our latest P2P lending market forecast is contained in the current Online Banking Report here (Jan 2013, subscription).

Comments (1)
Categories: Lending Club , P2P Lending , Prosper

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Jim, I am also excited about the future of p2p lending and crowdfunding. Although I certainly wouldn't call them synonymous as you have done in the title of this post.

They have some things in common but crowdfunding is its own distinct industry. It will be interesting to see the equity crowdfunding space unfold in the coming years but I would argue that from an investor perspective it will be a lot more risky than a p2p lending investment.

Now, debt-based crowdfunding for businesses could be a different story. Investors who loan money to established companies with a proven track record of profits will likely do better than those who invest in the equity of startups. At least that is my prediction.

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