As peer-to-peer lending sites become more established, they have had to adjust their business models, and with each tweak the companies seem to move closer to the model of a traditional bank.
The original idea — consumers offering loans directly to each other — was touted as a new form of financial services that removed banks from the lending process. But regulatory scrutiny prompted two key players to ally with a bank and adopt risk-management polices that exclude many borrowers — a contrast to the democratic ideal of providing credit to the masses, as once advocated.
And a new entry in the peer-to-peer space, Pertuity Inc., has moved the model even closer to banking with a service that functions much as a traditional mutual fund and makes the social element of social lending seem like an afterthought.
"Our business has really hinged upon very traditional financial services underpinnings," Kim Muhota, Pertuity's chief executive, said in an interview. "A borrower or lender coming to the business will feel … the process that they go through" is very familiar.
The Pittsburgh company was expected to formally launch its lending site today. Under its model, borrowers request loans, and the company decides whether to approve the requests and fund the loans. Pertuity began testing its service last week.
Loans generated on the site are bundled into one of two mutual funds, National Retail Fund II, for borrowers with FICO scores above 720, and National Retail Fund III, for borrowers with scores between 660 and 720. The funds are administered by Gemini Fund Services, and Fifth Third Bancorp is their custodian.
Individual investors can buy shares in the funds; the minimum required purchase is $1,000. Investors can see the names and descriptions of borrowers whose loans make up the portfolio but cannot choose the loans assigned to a fund or the interest rates charged.
"We approve the borrower and price the borrower," Mr. Muhota said. "What we then do at that point is aggregate the borrowers in broad pools of like risk."
Borrowers must have FICO scores of at least 660.
Ron Shevlin, a senior analyst at Aite Group LLC in Boston, said this model is in sharp contrast to the early days of peer-to-peer lending, when prospective borrowers would pitch their cases directly to potential investors — explaining why they wanted a loan and providing their income, credit score, and other financial details — at sites operated by companies such as Prosper Marketplace Inc. and Lending Club Corp.
He said that Pertuity's model minimizes the social element. "The original notion of P-to-P — we've gone really far away from that." Due largely to regulatory pressure, companies in the social lending business have become "a lot more like banks than the original concept."
Another key change is that Pertuity funds loans using its own capital, much as a traditional bank, then packages the debt into investment vehicles through the NRF.
The loan process at both Prosper and Lending Club more closely resembles an online auction, and a borrower is granted a loan only after investor demand becomes sufficient to fund the entire loan.
Both Prosper and Lending Club have partnerships with WebFinancial Corp.'s WebBank, which funds the loans. Prosper originally funded the loans and offered promissory notes to individual investors, and Lending Club originally facilitated loans directly between users.
Pertuity funds loans with capital from private investors, Mr. Muhota said, and expects to receive a venture capital investment. Because Pertuity is not a bank, it does not have the same reserve requirements, he said, though "funding is obviously dependent on lender interest or lender supply, so we do drive the loan origination based on lender demand."
Charles A. Schliebs, an independent trustee at National Retail Fund, said the Pertuity setup provides "the key elements of regulation, broad diversification — very different from anything else I've seen in this space."
Pertuity is overseen by the Federal Trade Commission and state regulators, and Mr. Muhota said this should protect it from the regulatory backlash that others have faced. Lending Club stopped facilitating loans for six months last year as it reshaped its model, and Prosper stopped making loans in October and has yet to resume.
Mr. Muhota has 11 years of banking experience, most recently as an executive in the retirement services and investment products unit of PNC Financial Services Group Inc..
Analysts said the peer-to-peer lending market is still evolving.
James Van Dyke, the principal and founder of Javelin Strategy and Research, said that "unless they've got significant funding and a great strategy around the regulatory minefield in this space, they're going to fail … . The big question for Pertuity Direct is not, do they have the next innovative idea? It's, do they have a great plan that's at least as good as the leaders now to navigate the regulatory minefield?"
Renaud Laplanche, Lending Club's CEO, said in an e-mail: "We will continue to witness new entrants trying out different business models and distribution channels — which is positive for the peer lending industry as a whole, as each new entrant that operates differently helps validate or eliminate new ideas."
Aite's Mr. Shevlin said that the social element of social lending has been fading since the concept was introduced. Prosper, for example, has tightened its qualifications for borrowers, and Lending Club has done the same to lenders in recent months by introducing income and net worth requirements, a move that Lending Club said disqualified one-quarter of the people who had signed up as lenders.
"Rich people lending to rich people is not [a] social good, if that's what it's going to evolve to," Mr. Shevlin said.