Marketplace lending uses online platforms to connect borrowers with investors willing to offer loans. It offers both new loans and refinancing.
A worldwide industry has developed to launch and expand these platforms. In 2017 alone, according to Fintech Global, venture capital firms invested $8.9 billion in 233 deals related to lending platforms.
That’s because a lot of money is flowing through these sites — enough to attract the attention of some of the world’s largest banks. No less a player than Goldman Sachs has established its own marketplace lending platform.
Transparency Market Research reports that, in 2015, this channel accounted for $26.2 billion in loans worldwide, a little under half of which were in the U.S. If the study’s projected 48.2% annual growth rate holds up, worldwide platforms like these will have the $1 trillion mark in their sights by the end of 2024.
Peer-to-peer vs. marketplace lending
“Peer-to-peer” or “P2P” lending is a related term that isn’t used much anymore in countries with well-developed financial industries. When platform lending was new, part of its appeal was that it allowed individuals with only hundreds or thousands of dollars to invest to make loans to other people — peers — who wanted to borrow similar amounts. Over the years, banks and other major institutions became more active, crowding out true P2P lending. Although some developing economies still have robust P2P platforms, Sharestates is one of only a few remaining in the U.S. through which retail investors participate on par with institutional investors.
Balance-sheet vs. marketplace lending
The borrower’s income and creditworthiness form the basis for marketplace lending terms. Applicants prove these through tax or bank records or provide a forward-looking business plan. In some cases, lenders make decisions based entirely on the borrower’s self-declared statement. This differs from balance-sheet lending, which is another form of platform lending. Balance-sheet lending involves putting a lien on a property — an asset on the balance sheet.
To learn more about marketplace lending, click here for the glossary entry.