1 00:00:00.750 --> 00:00:03.060 Allyson Berger: In the fall of 2008, borrowing money from a 2 00:00:03.060 --> 00:00:06.450 bank became almost impossible. Markets crashed and credit 3 00:00:06.450 --> 00:00:10.170 froze. Hardworking people all around the country who depended 4 00:00:10.170 --> 00:00:13.170 on the accessibility of credit were left wondering if there was 5 00:00:13.170 --> 00:00:16.560 an alternative. Hi there, I'm Allyson Berger, and in this 6 00:00:16.560 --> 00:00:19.620 episode, I'm going to tell you about the rise and fall of peer 7 00:00:19.620 --> 00:00:20.310 to peer lending. 8 00:00:31.380 --> 00:00:33.810 When banks stopped lending during the Great Recession, 9 00:00:33.840 --> 00:00:36.750 people looked to their peers for help, whether that was friends 10 00:00:36.750 --> 00:00:41.070 or family, but asking for a loan from your peers can be awkward, 11 00:00:41.100 --> 00:00:44.910 uncomfortable and oftentimes ineffective. I mean, would your 12 00:00:44.910 --> 00:00:47.040 network of friends feel comfortable giving you a loan 13 00:00:47.040 --> 00:00:49.620 just so you could consolidate your existing debts at a lower 14 00:00:49.620 --> 00:00:53.670 interest rate? It sounds weird. Well, two San Francisco based 15 00:00:53.670 --> 00:00:56.520 startups believed they had the answer for that. What if your 16 00:00:56.520 --> 00:00:59.460 peers were simply strangers who wanted to help other strangers 17 00:00:59.460 --> 00:01:03.060 accomplish goals just like that? And voila, peer to peer lending 18 00:01:03.060 --> 00:01:03.660 was born. 19 00:01:03.930 --> 00:01:05.850 Sean Murray: The first two well known peer to peer lenders in 20 00:01:05.850 --> 00:01:09.990 the United States were Prosper Marketplace and Lending Club and 21 00:01:09.990 --> 00:01:13.230 Prosper was founded first, but Lending Club became much larger. 22 00:01:13.560 --> 00:01:17.040 I first encountered the concept at the very end of 2008. I was 23 00:01:17.040 --> 00:01:19.140 working in finance where a lot of my colleagues and I saw 24 00:01:19.140 --> 00:01:21.840 firsthand how much credit had dried up. The whole idea that 25 00:01:21.840 --> 00:01:24.180 you can lend money to other individuals through a website, 26 00:01:24.240 --> 00:01:26.760 and that that website would take care of all the work for you was 27 00:01:26.760 --> 00:01:30.060 really enticing. There could also be a pretty nice return. I 28 00:01:30.060 --> 00:01:32.280 didn't get into it at that time. But I know a few people that 29 00:01:32.280 --> 00:01:32.580 did. 30 00:01:32.940 --> 00:01:34.950 Allyson Berger: After Lending Club and Prosper worked out the 31 00:01:34.950 --> 00:01:37.470 kinks with the Securities and Exchange Commission, both 32 00:01:37.470 --> 00:01:40.650 companies took off. The Harvard Business Review called peer to 33 00:01:40.650 --> 00:01:44.370 peer lending one of the top breakthrough ideas for 2009. And 34 00:01:44.370 --> 00:01:48.240 by 2010, blogs and forums began to sprout up on the web to 35 00:01:48.240 --> 00:01:51.210 spread the gospel of earning a nice return by lending to your 36 00:01:51.210 --> 00:01:52.000 peers. 37 00:01:52.000 --> 00:01:54.390 Sean Murray: As far as mainstream acceptance goes, peer 38 00:01:54.390 --> 00:01:57.330 to peer lending grew slowly at first. I first wrote about it in 39 00:01:57.330 --> 00:02:02.460 2010. But it wasn't until 2013, things really shifted gears. It 40 00:02:02.460 --> 00:02:05.700 went from blogs and forums to the industry actually having a 41 00:02:05.700 --> 00:02:08.130 conference in New York City. The called it LendIt. 42 00:02:08.370 --> 00:02:10.740 Allyson Berger: The first LendIt took place here at Convene in 43 00:02:10.740 --> 00:02:13.950 midtown Manhattan. LendIt's founders told deBanked that the 44 00:02:13.950 --> 00:02:17.520 place was packed, they had more than 400 people registered and a 45 00:02:17.520 --> 00:02:20.700 line that literally ran out the door. Although the place was 46 00:02:20.700 --> 00:02:23.820 only designed to hold 200 people, they managed to squeeze 47 00:02:23.820 --> 00:02:25.170 in 375. 48 00:02:25.470 --> 00:02:27.480 Sean Murray: So I heard about this show and I was like, oh, 49 00:02:27.480 --> 00:02:30.330 wow, I probably should have been there. You know what, let me 50 00:02:30.330 --> 00:02:32.910 open up an account on one of these platforms and try it out 51 00:02:32.910 --> 00:02:37.170 for myself. So January 2014, I opened up an investor account at 52 00:02:37.170 --> 00:02:40.650 Lending Club and put in $500. I just wanted to learn everything 53 00:02:40.650 --> 00:02:43.860 about it. I wasn't thinking about investing yet because I'm 54 00:02:43.860 --> 00:02:47.160 a really conservative investor. And I feel like a lot more trust 55 00:02:47.160 --> 00:02:50.580 was needed for me to really get comfortable, something that 56 00:02:50.580 --> 00:02:52.170 signaled that this is all for real. 57 00:02:52.540 --> 00:02:55.870 Allyson Berger: On December 10 2014, Lending Club went public 58 00:02:55.870 --> 00:02:59.560 on the New York Stock Exchange and was valued at $8.5 billion. 59 00:03:00.100 --> 00:03:03.130 By the end of the first day of trading, Lending Club stock was 60 00:03:03.130 --> 00:03:06.670 up over 50%, as people saw the company as the wave of the 61 00:03:06.670 --> 00:03:07.210 future. 62 00:03:07.240 --> 00:03:10.330 Sean Murray: 2014 was a big year in financial technology, 63 00:03:10.360 --> 00:03:14.200 FinTech, peer to peer lending. I went to the 2014 LendIt 64 00:03:14.200 --> 00:03:16.930 Conference. I read the Lending Club IPO documents and I was 65 00:03:16.930 --> 00:03:20.350 like, "Yeah, I get this, I'm totally in." Let me break it 66 00:03:20.350 --> 00:03:22.630 down for you: you really don't need to put in that much money 67 00:03:22.630 --> 00:03:25.000 to make a go of investing on the platform because you could 68 00:03:25.000 --> 00:03:29.500 contribute as little as $25 per loan. So with that initial $500 69 00:03:29.530 --> 00:03:34.150 I put in, I spread it out across 20 loans at $25 each. And as 70 00:03:34.150 --> 00:03:37.240 those loans paid back, with the money I got from it, I put that 71 00:03:37.240 --> 00:03:41.620 money back into new loans. And honestly over time, I invested 72 00:03:41.620 --> 00:03:44.590 into a lot more loans and put a lot more money onto the 73 00:03:44.590 --> 00:03:45.220 platform. 74 00:03:45.670 --> 00:03:47.260 Off Camera: How much did you ultimately invest? 75 00:03:48.160 --> 00:03:50.740 Sean Murray: Honestly? A hundred grand. 76 00:03:51.200 --> 00:03:54.170 And I put in some money with Prosper too, but not that much. 77 00:03:54.530 --> 00:03:57.410 And my returns seemed okay, it wasn't as much as what everyone 78 00:03:57.410 --> 00:04:01.220 else was talking about, wasn't getting double digit returns, 79 00:04:01.280 --> 00:04:04.790 but I was okay with them. But Lending Club, Lending Club was 80 00:04:04.790 --> 00:04:09.980 on fire. They put out $16 billion by the end of 2015. I 81 00:04:09.980 --> 00:04:12.830 mean, everyone was getting into peer to peer lending, everyone. 82 00:04:13.250 --> 00:04:16.400 And then 2016 happened and it was like a bomb went off. The 83 00:04:16.400 --> 00:04:19.250 CEO of Lending Club resigned in a big scandal. 84 00:04:19.460 --> 00:04:22.220 News Report: A shake up in the financial industry as Lending 85 00:04:22.220 --> 00:04:27.170 Club's stock drops 26% on news, the company's CEO Renaud 86 00:04:27.170 --> 00:04:29.060 Laplanche is stepping down. 87 00:04:29.090 --> 00:04:31.310 Sean Murray: So I suppose it could have been worse, because I 88 00:04:31.310 --> 00:04:35.090 didn't lose my investment. But I definitely lost that trust that 89 00:04:35.090 --> 00:04:37.970 had been built up. And that was the beginning of the end for me 90 00:04:38.120 --> 00:04:41.090 and I think for a lot of people in general with peer to peer 91 00:04:41.090 --> 00:04:42.890 lending. The trust was shaken. 92 00:04:43.250 --> 00:04:45.500 And then of course you had all the big banks that were sitting 93 00:04:45.500 --> 00:04:48.200 on the sidelines, like "Hey, why are you letting all these 94 00:04:48.230 --> 00:04:51.230 average Joes hog up all the good return?!" And Wall Street 95 00:04:51.230 --> 00:04:53.000 just jumped in from all sides. 96 00:04:53.120 --> 00:04:55.220 Allyson Berger: A few months later, Goldman Sachs unveiled a 97 00:04:55.220 --> 00:04:58.910 rival lending product, small personal loans for individuals. 98 00:04:59.270 --> 00:05:02.210 Their aim was to disrupt the peer to peer lending market, 99 00:05:02.480 --> 00:05:04.460 they called their loan company Marcus. 100 00:05:04.630 --> 00:05:07.330 Sean Murray: 2016 was basically a wake up call for everybody. 101 00:05:07.810 --> 00:05:11.830 You had Wall Street institutions competing against average Joes 102 00:05:11.980 --> 00:05:15.310 to invest in the same loan. And then you had Wall Street on the 103 00:05:15.310 --> 00:05:18.910 other side, telling your customer not to take the loan 104 00:05:19.090 --> 00:05:22.360 that you were going to invest in. And it's like, whoa, wait a 105 00:05:22.360 --> 00:05:25.150 minute, this is like a high stakes Wall Street game here. 106 00:05:25.390 --> 00:05:28.510 We're like a long way from peer to peer lending. This isn't 107 00:05:28.510 --> 00:05:32.350 peers helping peers anymore. And then there was talk about 108 00:05:32.350 --> 00:05:34.540 whether or not the platforms were even calculating the 109 00:05:34.540 --> 00:05:37.450 percentage returns correctly and it's like, okay, let's just take 110 00:05:37.450 --> 00:05:41.440 a step back, I don't think the returns match the risk anymore. 111 00:05:41.650 --> 00:05:45.040 Allyson Berger: By the end of 2017, less than 10% of the money 112 00:05:45.040 --> 00:05:47.800 Lending Club was lending out to borrowers was coming from 113 00:05:47.800 --> 00:05:50.680 individual peer investors managing their own accounts. 114 00:05:50.710 --> 00:05:53.740 Banks had become the largest investors on the platform. By 115 00:05:53.740 --> 00:05:56.500 the end of 2018, peers made up less than 6%. 116 00:05:57.080 --> 00:05:59.090 Sean Murray: I saw the writing on the wall. I literally wrote 117 00:05:59.090 --> 00:06:01.670 an article in July 2016 that said, "peer to peer 118 00:06:01.670 --> 00:06:04.640 lending is deader than dead." There have been other platforms 119 00:06:04.640 --> 00:06:07.580 out there... peer to peer for business loans, peer to peer for 120 00:06:07.580 --> 00:06:10.910 real estate, peer to peer for this, for that, but I think in 121 00:06:10.910 --> 00:06:14.840 the United States, the emotional aspect of peers helping peers 122 00:06:14.900 --> 00:06:17.540 and the purity of what peer to peer lending was supposed to be, 123 00:06:17.660 --> 00:06:21.260 I think that was long gone. In February 2020, Lending Club, for 124 00:06:21.260 --> 00:06:24.440 example, announced they were buying a bank. Peer to peer 125 00:06:24.440 --> 00:06:27.380 lending was supposed to replace bank lending. It was supposed to 126 00:06:27.410 --> 00:06:30.890 disrupt it. And now here we are going from peer to peer lending 127 00:06:31.280 --> 00:06:35.180 back to bank lending. It's really kind of ironic. Peer to 128 00:06:35.180 --> 00:06:39.290 peer lending really had a good 15 year run, but at its peak, it 129 00:06:39.290 --> 00:06:42.500 was only really popular for about three to four years. 130 00:06:42.710 --> 00:06:45.110 Allyson Berger: On October 7 of this year, Lending Club 131 00:06:45.110 --> 00:06:48.020 announced it was ending the retail investor aspects of its 132 00:06:48.020 --> 00:06:51.560 lending platform for good to focus on their plans of becoming 133 00:06:51.560 --> 00:06:54.920 a bank. That will close the door once and for all, for all peer 134 00:06:54.920 --> 00:06:58.220 to peer lending with Lending Club and for many the era of 135 00:06:58.220 --> 00:07:01.430 peer to peer lending. So that's all for now. Until next time, 136 00:07:01.460 --> 00:07:02.570 I'm Allyson Berger.