Peer-to-peer lending most immediately brings to mind the largely feel-good act of extending small-time money to small businesses and individuals with quirky projects—a curiosity at best and no threat to the lending hegemony of big banks. What’s less appreciated is how successful peer-to-peer lending platforms such as Prosper and Lending Club have been in connecting wholesale numbers of individual lenders and borrowers. Yes, they still allow you to go out there and pick a proposition to invest in. But these successful, venture capital-backed startups also offer portfolios of loans that have quietly registered four to six years of solid returns with low defaults.
The more that record holds, the more these diversified offerings represent an asset class of sorts within fixed income.
The upshot: Those earning little-to-nothing on their cash can more easily be connected to people who are willing to give them an above-market rate of return for capital, with no intermediary bank needed. “It’s absolutely the perfect arbitrage between countless frustrated low-yield investors and countless desperate small business owners hungry for financial survival and growth,” says Robert Lamb, a professor of finance at New York University.