Peer-to-peer lending (P2P) is growing by such leaps and bounds that credit unions would be wise to develop strategies to either deal with this emergent force in financial services or form partnerships with these online lenders that have sprouted like mushrooms across the landscape.
That's according to a report from Filene Research Institute, written by Sean Geobey, assistant professor at the School of Environment, Enterprise and Development at University of Waterloo in Ontario, Canada.
Entitled "Peer-to-Peer Lending and the Future of Cooperation," the report warned that this new lending market has "major disruptive potential within financial services. Developing a strategy to embrace, adapt to, or defend against peer-to-peer lending will be a necessary step for all credit unions within the next five years."
Geobey emphasized the five-year time frame because the matter is that urgent, he told Credit Union Journal.
"Compared to the loan volumes generated by banks and credit unions, P2P lending remains rather modest," he said. "But some of these online lenders are growing exponentially in size, some are even doubling their portfolio every year."
In 2014, P2P lending in the U.S. amounted to more than $11.1-billion, the report noted – growing at a rate of 223% over the prior year.
Moreover, P2P lending (also called digital lending or marketplace lending) holds great appeal to some borrowers, particularly web-savvy Millennials who have shunned traditional financial institutions and enjoy the ease-of use and quick turnaround provided by online lenders.
In forming partnerships, some credit unions and P2P lenders can mutually enjoy benefits provided by each other, Geobey said. "Credit unions have an active, engaged and loyal membership – something P2P lenders eagerly seek out," he said. "Credit unions also have strong brand loyalty among its customers, high capacity, and access to financial products far beyond the scope of most P2P lenders." [Indeed, most P2P lenders currently only offer unsecured lending products].
Overall, entering into deals with P2P lenders would enable credit unions to deepen their involvement in three crucial areas: community development, consumer lending, and small business lending.
From the other side, P2P lenders offer technological expertise (which many credit unions simply do not possess, nor want to spend the money on), as well as a huge new potential pool of customers – Millennials, who now number some 75 million people. Snaring even a small part of this coveted demographic would ease worries that existing credit union members are rapidly aging.
"Online peer-to-peer lending platforms can provide a pipeline to bring in new members who might not otherwise consider a mainstream financial institution ," the report stated. "Already these online platforms have lower cost structures than brick-and-mortar loan providers, and although their focus is mostly on unsecured lending, some are moving into more complex financial services."
The largest player in P2P, Lending Club has already issued more than $9.25 billion in loans through March 2015. Lending Club, the report noted, also provides detailed real-time information about its total loan portfolio, offering a degree of transparency that has likely been critical to the platform's role as a market builder.
Another dominant force in the embryonic industry, Social Finance (better known as SoFi) has arranged more than $3 billion in loans since its founding in 2012. SoFi has also aggressively entered into the fields of auto loans and consumer lending.
However, given the youth of the P2P lending industry, there are some problems associated with credit unions seeking partnerships with such entities. For one thing, regulatory issues surrounding P2P remain murky and ever-evolving. "The nature of peer-to-peer lending straddles securities regulations and consumer lending. The expansion of these platforms in the U.S. has been largely on a state-by-state level, with regulators playing catch-up with industry developments," the report cautioned. "Because of these legal complexities, there are a few different legal and jurisdictional configurations that each platform has taken."
For example, Lending Club operates in all but four US states while another prominent online lender, Prosper, operates in all but three U.S. states.
In the likely event that regulators tighten the web around P2P lenders, legal risks and legal costs would surely ensue for them and their partners.
Another problem has to do with the high cost of developing and maintaining a peer-to-peer lending platform. For example, Lending Club spent more than $1.9 million in engineering and product development in 2010 – that figure leapt to $34.7-million in 2014. Presumably, any credit union partner would likely have to integrate such rising expenses.
Other potential problem spots arising from partnerships include "cannibalization of existing credit union services," costly risk compliance management and third-party oversight and the possibility of online lending platforms growing in importance and gaining further bargaining clout, particularly if credit union partners become more dependent on them for fee revenue.
On the whole, he added, partnerships with P2P lenders should provide great benefits to some credit unions, but for a substantial chunk of the credit union sector working with P2P lenders will be much more trouble than it's worth.
Some credit unions have already plunged into deals with P2P entities. The $72 billion Navy Federal Credit Union, for example, has a partnership arrangement with LendKey.
Aaron Aggerwal, Navy FCU's AVP of education lending, told CU Journal that the partnership with LendKey "allows us to serve our nearly one million members currently carrying student loans."
Navy FCU members, he added, "now have access to competitive loan products that provide the funding needed for school when federal loans, grants and scholarships are not enough. Our members are also able to simplify their student loan payments by refinancing their existing private student loans into a single loan -- potentially at a lower rate."
Such partnerships, Aggerwal indicated, "allow us to create a customized application and loan servicing process that is simple, easy and efficient, while providing our members with the exceptional service they have come to expect."
