It’s been fascinating to follow the marketplace lending space over the past year. The creation of different classes of marketplace loans (whole vs. fractional) has materially improved capital access by shortening the amount of time it takes for borrowers to secure funding.
In the early days, when borrower demand still outpaced lender supply, it could take up to a few days to fill a loan. Lenders consisted of small retail investors with limited capital, so platforms would split loans into fractions to make it easier for investors to participate. Since then, large institutional investors (i.e. hedge funds, pension funds, insurance companies, banks, HNW individuals, etc.) have joined the marketplace. For instance, Blackrock was responsible for funding 17% of loans on Prosper last year, while Santander backed 25% of whole loans on Lending Club.
Unlike retail investors, though, institutional investors are capable of investing at scale. To accommodate this, platforms reserve blocks of loans on their marketplace as whole loans that can only be bought or matched in full. With the substantial growth in whole loan pools, institutional investors are able to attain the legal advantages of investing in whole loans in large volume. At the same time, platforms with an eye towards sound market structure and participation, have implemented measures to keep large institutions from crowding out retail investors (e.g. random loan assignment to pools to prevent bias in loan quality).
All the institutional investors entering the market are giving the entire funding process a shot in the arm. Whereas it used to take several days for a borrower to get funded, it now averages less than a day*. Furthermore, portfolio managers commonly employ purchasing algorithms through platform APIs, so many loans are in fact snapped up within just a matter of seconds.
While there are other issues involved in building a dominant business in this space (e.g. partnering to get products in front of more consumers), measures like these that maintain a competitive and diverse market are also key for building a lasting, durable product. The bifurcation of marketplace loans, along with the measures taken to maintain a healthy balance in supply and demand, have been great developments in financial technology. The next step in that regard may be to implement more secondary marketplaces for loans, where investors can exit investments by offloading them to other willing buyers.
*It may take several more days for loans to review and originate, and for borrowers to receive money.
