Aaron Vermut
Aaron Vermut

Marketplace lending at the cusp of explosive growth

NEW YORK, NY – While marketplace lending has seen its share of developments in its first decade of existence, there’s plenty more where that came from, Aaron Vermut predicts.

Prosper’s CEO described how traditional markets evolve as he attempted to predict how marketplace lending will change in the coming years when he delivered a keynote speech at the 2015 Altfi Global Summit today in New York City.

One only has to look to the development of the stock market for an example, Mr. Vermut explained. That began with 24 stock brokers and merchants signing an agreement under a buttonwood tree in 1792.

Aaron Vermut
Aaron Vermut

As it became more successful, more players wanted to take part on both sides. That spawned more tools to properly work with a wider set of needs which in turned produced data.

Data was key, for it provided players with the ability to justify their decisions.

Market events obviously play key roles, Mr. Vermut added. For example the 1929 crash produced the Securities Act of 1933, legislation which has shaped market activity ever since.

The commodities market also had inefficient origins, Mr. Vermut said. It was marked by inefficient pricing and the inconvenience of having to accept delivery. Commodities were also hard to buy into, he added.

Developments like futures exchanges and exchange traded funds improved liquidity.

Throughout history most people had no access to real estate either, Mr. Vermut said. On a large scale the ruling classes controlled most of the land.

On an individual scale the process of vetting properties was very time consuming, Mr. Vermut explained. Now people can invest in portfolios where properties are assessed by professionals.

Until recently, people wishing to borrow for personal reasons had few options save for friends and family, Mr. Vermut said. Unsecured credit card bank lending is less than 50 years old.

Before marketplace lending the only way for investors to gain access to that market was to invest in a bank card issuer, Mr. Vermut said. Given the credit card receivables market has grown to $850 billion, many investors wanted to participate in the space.

That began to change in 2005, as the peer-to-peer industry began to develop.

“That is when unsecured consumer debt shifted from the hands of a privileged few and began to be distributed to a broader marketplace.”

The first platforms started between 2006 and 2008, a period Mr. Vermut described as the “wild west.” Compared to its 2015 condition it was much more inefficient in its early years, he said.

Starting in 2009, the space began to take form as the Securities and Exchange Commission began looking at marketplace lending. Techniques for data aggregation and customer acquisition began to be refined.

Consider the period between 2009 and 2011 as the time when the marketplace lending model was proven, Mr. Vermut said. Return and behavior patterns began to be established.

Several factors have contributed to the industry’s rapid growth since 2012, Mr. Vermut said. Institutions and hedge funds began to participate. This caused much debate in the industry, for fear of the “peer” to be eliminated from peer-to-peer lending, but Mr. Vermut said that development, along with the ability to purchase whole loans was necessary for the industry to properly scale.

Lending Club has gone public and private securitizations have occurred, but there are still plenty of firsts to come, Mr. Vermut predicted.

Look for more rated securitizations and the stirrings of a secondary market, Mr. Vermut said.

While those are indeed milestone developments, the most important event to come is the underperforming section of the cycle.

“The real litmus test is how these loans will perform in a downturn,” Mr. Vermut said.

“If the loans perform, it will unleash a wave of innovation that will make what is happening now look small and nascent by comparison.”