12 ms·

How a Trillion-Dollar Market Remains Hidden in Plain Sight

40 points by funkyy 12y ago

JohnSz 12y ago
This reminds me of www.zidisha.org where you can make micro-loans to 3rd-world individuals.
- rbinv 12y ago
  I think kiva.org is pretty successful in this space, too.
- kapitalx 12y ago
  The OP is likely referring to prosper.com and lendingclub.com which are for profit businesses for peer to peer lending in the US.
narrator 12y ago
The market is really only here while cd interest rates are stuck at near 1%. That's likely to go on for a while. Right now the spread is big enough to make this work.
userbmf 12y ago
Market lenders aren't banks. They cannot use fractional reserve banking. If they take in $100 they loan out $100. A bank takes in $100 having loaned out $10K to satisfy reserve requirements 10% (likely less but keeping it simple). So if most lending moved to market lenders we would see a collapse in the money supply.
- pbhjpbhj 12y ago
  Don't we already have a collapse in the money supply? I wonder if the huge number of people/organisations that can loan money but not set up a fractional reserve system (eg because of regulations) amounts to a smaller amount of money available. People making smaller loans may be less risk-averse too?
- jackgavigan 12y ago
  If the bank's reserve requirement is 10%, wouldn't it only be able to lend out $90 of the $100 it had taken in deposits?
  - radmuzom 12y ago
    Yes. But typically banks can leverage - for example, the bank which employs me typically lends out around $125-$135 for every $100 dollars in deposits. I guess the OP was trying to explain the money multiplier but got the example wrong. (Money multiplier is the inverse of the reserve requirement)
    - arjunnarayan 12y ago
      No. Deposits are what are used to "lever" up in the first place. If a bank lends out $125 for every $100 that it gets in deposits, where is the other $25 coming from? The answer is that it comes from equity. Banks have two sets of inputs: (1) Equity (i.e. the owners of the bank put up capital. This is great because it requires them to have 'skin in the game') (2) Incoming debt (i.e. depositors give them money.). They have two outputs: (3) Outgoing debt (i.e. the loans the bank makes out to people, in the form of mortgages, small business loans, lines of credit, etc.) (4) Reserves (money they have to keep on hand) Notice that as an accounting identity, we must have that (1) + (2) = (3) + (4). Leverage limits essentially limit the ratio (2):(1). For example, a leverage limit of 9:1 means that a bank lends out $100 has to source at least $10 of that from equity, and at most $90 of that from incoming debt. Fractional reserve limits essentially limit the ratio (3):(4). As "user downandout shows in a sister thread to this one, this can be used to determine a "multiplier" for the economy as a whole, since for a nonzero limit, there is a closed form fixed point solution maximum multiplier ratio in the economy as a whole. (Although in practice the "true" multiplier can be lower since people might stuff their mattresses with money, or have lots of loose change lying around, etc.). Note that the fractional reserve limits are something that is enforced on banks by the government to limit the multiplier. This restriction doesn't exist on P2P lenders (as of yet), and so if any thing, it means that P2P lenders are even freer to do bad things (such as have no reserves on hand at all).
- grayclhn 12y ago
  No, you would need a larger monetary base to support the same size economy. But printing more money is easy.
Animats 12y ago
Peer to peer small lending is easy. Peer to peer small debt collection is hard. That's why the low end of lending is so expensive.
- rgrieselhuber 12y ago
  And, in many markets, a good deal of kneecapping is still involved. (Not a joke.)
- justinsb 12y ago
  I remember reading the T&Cs for one of these 'marketplace lenders'; they would do collections for the lender, if the borrower was 60 days late (which doesn't even seem that late). But the lender would get nothing, setting up a huge conflict of interest for the marketplace: they could make a lot more money on a loan in default than a successful loan. Wild West indeed. Edit: Yuk.. "Currently, Lending Club charges investors... 18% of the amount recovered if the loan is 16 or more days late and no litigation is involved". In other words: an automated-payment screws up, Lending Club sends a letter to the borrower, who fixes the problem: Lending Club takes 18% of the principal. https://www.lendingclub.com/public/rates-and-fees.action https://www.lendingclub.com/public/rates-and-fees.action
justincormack 12y ago
"5% of originations" er, thats not a sane margin. That is around where current banks charge, probably higher, but banks take credit losses in that, but this is pure intermediation.
freshflowers 12y ago
Yeah, because unlike taxis and hotels, loans aren't heavily regulated for good reasons. When did disruptive innovation devolve into reviving old shady businesses?
7Figures2Commas 12y ago
Parts of this article gloss over important facts. > These new platforms are able to create a marketplace where lenders and borrowers can find one another and agree to terms, all without the involvement of retail banks or credit card companies. Credit card companies provide revolving lines of credit; the author's "marketplace lenders" provide term loans. These are two different beasts. While some folks do use term loans to pay off debt with a higher interest rate under a revolving line of credit, the non-professionals eager to finance consolidation loans would be wise to heed Mark Cuban's advice, "Always look for the fool in the deal. If you don't find one, it's you." > And instead of receiving 1% interest for keeping their money in a CD, active lenders on marketplace platforms receive, on average, an 8% return on their investments. Most CDs are FDIC-insured. Casually comparing an FDIC-insured certificate of deposit to an unsecured note that has both credit and interest rate risk is insanely foolish. > Earlier this year my whitepaper on marketplace lending forecast that the sector has the potential to originate $1T in loans globally by 2025. "Marketplace lenders" are absolutely here to stay, but the influx of capital to this space has a lot to do with ZIRP. The author doesn't acknowledge this, but when interest rates start to rise, which could happen within the next year, the environment for "marketplace lenders" is going to change.

40 points by funkyy 12y ago

JohnSz 12y ago

This reminds me of www.zidisha.org where you can make micro-loans to 3rd-world individuals.

rbinv 12y ago
I think kiva.org is pretty successful in this space, too.
kapitalx 12y ago
The OP is likely referring to prosper.com and lendingclub.com which are for profit businesses for peer to peer lending in the US.

narrator 12y ago

The market is really only here while cd interest rates are stuck at near 1%. That's likely to go on for a while. Right now the spread is big enough to make this work.

userbmf 12y ago

Market lenders aren't banks. They cannot use fractional reserve banking. If they take in $100 they loan out $100. A bank takes in $100 having loaned out $10K to satisfy reserve requirements 10% (likely less but keeping it simple). So if most lending moved to market lenders we would see a collapse in the money supply.

pbhjpbhj 12y ago
Don't we already have a collapse in the money supply? I wonder if the huge number of people/organisations that can loan money but not set up a fractional reserve system (eg because of regulations) amounts to a smaller amount of money available. People making smaller loans may be less risk-averse too?
jackgavigan 12y ago
If the bank's reserve requirement is 10%, wouldn't it only be able to lend out $90 of the $100 it had taken in deposits?
- radmuzom 12y ago
  Yes. But typically banks can leverage - for example, the bank which employs me typically lends out around $125-$135 for every $100 dollars in deposits. I guess the OP was trying to explain the money multiplier but got the example wrong. (Money multiplier is the inverse of the reserve requirement)
  - arjunnarayan 12y ago
    No. Deposits are what are used to "lever" up in the first place. If a bank lends out $125 for every $100 that it gets in deposits, where is the other $25 coming from? The answer is that it comes from equity. Banks have two sets of inputs: (1) Equity (i.e. the owners of the bank put up capital. This is great because it requires them to have 'skin in the game') (2) Incoming debt (i.e. depositors give them money.). They have two outputs: (3) Outgoing debt (i.e. the loans the bank makes out to people, in the form of mortgages, small business loans, lines of credit, etc.) (4) Reserves (money they have to keep on hand) Notice that as an accounting identity, we must have that (1) + (2) = (3) + (4). Leverage limits essentially limit the ratio (2):(1). For example, a leverage limit of 9:1 means that a bank lends out $100 has to source at least $10 of that from equity, and at most $90 of that from incoming debt. Fractional reserve limits essentially limit the ratio (3):(4). As "user downandout shows in a sister thread to this one, this can be used to determine a "multiplier" for the economy as a whole, since for a nonzero limit, there is a closed form fixed point solution maximum multiplier ratio in the economy as a whole. (Although in practice the "true" multiplier can be lower since people might stuff their mattresses with money, or have lots of loose change lying around, etc.). Note that the fractional reserve limits are something that is enforced on banks by the government to limit the multiplier. This restriction doesn't exist on P2P lenders (as of yet), and so if any thing, it means that P2P lenders are even freer to do bad things (such as have no reserves on hand at all).
grayclhn 12y ago
No, you would need a larger monetary base to support the same size economy. But printing more money is easy.

Animats 12y ago

Peer to peer small lending is easy. Peer to peer small debt collection is hard. That's why the low end of lending is so expensive.

rgrieselhuber 12y ago
And, in many markets, a good deal of kneecapping is still involved. (Not a joke.)
justinsb 12y ago
I remember reading the T&Cs for one of these 'marketplace lenders'; they would do collections for the lender, if the borrower was 60 days late (which doesn't even seem that late). But the lender would get nothing, setting up a huge conflict of interest for the marketplace: they could make a lot more money on a loan in default than a successful loan. Wild West indeed. Edit: Yuk.. "Currently, Lending Club charges investors... 18% of the amount recovered if the loan is 16 or more days late and no litigation is involved". In other words: an automated-payment screws up, Lending Club sends a letter to the borrower, who fixes the problem: Lending Club takes 18% of the principal. https://www.lendingclub.com/public/rates-and-fees.action https://www.lendingclub.com/public/rates-and-fees.action

justincormack 12y ago

"5% of originations" er, thats not a sane margin. That is around where current banks charge, probably higher, but banks take credit losses in that, but this is pure intermediation.

freshflowers 12y ago

Yeah, because unlike taxis and hotels, loans aren't heavily regulated for good reasons. When did disruptive innovation devolve into reviving old shady businesses?

7Figures2Commas 12y ago

Parts of this article gloss over important facts. > These new platforms are able to create a marketplace where lenders and borrowers can find one another and agree to terms, all without the involvement of retail banks or credit card companies. Credit card companies provide revolving lines of credit; the author's "marketplace lenders" provide term loans. These are two different beasts. While some folks do use term loans to pay off debt with a higher interest rate under a revolving line of credit, the non-professionals eager to finance consolidation loans would be wise to heed Mark Cuban's advice, "Always look for the fool in the deal. If you don't find one, it's you." > And instead of receiving 1% interest for keeping their money in a CD, active lenders on marketplace platforms receive, on average, an 8% return on their investments. Most CDs are FDIC-insured. Casually comparing an FDIC-insured certificate of deposit to an unsecured note that has both credit and interest rate risk is insanely foolish. > Earlier this year my whitepaper on marketplace lending forecast that the sector has the potential to originate $1T in loans globally by 2025. "Marketplace lenders" are absolutely here to stay, but the influx of capital to this space has a lot to do with ZIRP. The author doesn't acknowledge this, but when interest rates start to rise, which could happen within the next year, the environment for "marketplace lenders" is going to change.