Last week, I posted about how Peer-to-Peer lending may be facing some headwinds. This week the Wall Street Journal reported on the challenges facing On Deck Capital. Most interesting from the WSJ article are the observations that the big players in Peer-to-Peer lending are facing their own headwinds as it becomes harder to unload loans to investors and the ever increasing number of competitors are chasing the same borrowers and investors are also increasing, accordingly, so is the competition amongst these companies which is possibly driving down their revenue and profitability.
With these increased pressures, it is unclear what happens if one of these entities fails. Are the structures (many of which are set up to be “bankruptcy resistant”) going to protect investors and borrowers? Who is going to service the portfolio in a bankruptcy or liquidation? No one has the answer. Moreover, what about a cascade effect on the entire industry if just one company fails and there is an issue with the structure? Would capital move away from this nascent industry?
As younger borrowers and investors continue to drive disruptive change, because of their acceptance to technology, in the retail financial world it is increasingly necessary to heed the old world advice that one must understand what they are investing in and what the risks are.