The emergence of funding problems at Prosper, one of the largest P2P lenders in the US, has highlighted the dangers of the switch from individual to institutional funding in the last few years.
Prosper is planning to lay off 28% of its workforce as it attempts to cut costs in the wake of a marked deterioration in its funding position. In April 2016, Citigroup, one of Prosper’s biggest institutional investors, announced that it would no longer buy Prosper’s debt, after its own investors started demanding significantly higher yields, leaving Prosper to find another partner to fill the gap.
SoFi, another alternative lender that specializes in the student loans market, is also seeking to diversify its funding sources in order to place it on a more secure footing and allow it to continue lending at its current levels.
Alternative lending has recently moved beyond its original ideal of matching together individual lenders and borrowers on a peer-to-peer basis. In an effort to extend lending capacity, these lenders have increasingly relied on institutional funding rather than retail deposits.
However, although this has allowed P2P providers to rapidly accelerate their lending, it has done so at the cost of over-dependency on a narrow base and diminishing their social USP.
P2P lenders should counter this trend by rediscovering their roots and tilting back towards retail investors. Not only will this move prove a more stable funding source should market sentiment deteriorate, it will restore the social element that made P2P lending such an attractive proposition in the first place.
By Daoud Fakhri, Prinicipal Retail Banking Analyst