Are institutions crowding out the individual investor?
Q&A with our CEO, Bo Brustkern.
Summer Tucker: Institutions and peer-to-peer lending are a hot topic and people are wondering, “Are institutions going to crowd out the individual investor?” Let’s ask Bo, our resident expert.
Bo Brustkern: This is super-common question. The first thing you need to understand is that there are really two markets for each origination platform. There is a whole-loan market that is built for institutions, and there is a fractional pool which is built for individual investors. For example: in September 2015, Lending Club had $260 million worth of loans available for institutions on their whole loan marketplace. That same month, they had $190 million worth of fractional Notes. That’s about 42% of the total originations for that month available to individual investors. These two pools – the whole loan and the fractional pool – are distinct and separate.
ST: OK but who decides which loans go where?
BB: It’s random, which is a good thing. When Lending Club originates a loan, they take that loan and randomly allocate it either to the fractional pool or the whole loan pool, so no one actually decides where it’s going… it’s just a randomizer that’s part of the Lending Club system.
ST: So is the fractional pool protected from institutional investors?
BB: The vast majority of institutions are off in Whole Loan Land while we individuals are trading in the fractional pool. It’s individual vs. individual in the fractional pool.
ST: You mentioned that 42% of originations at Lending Club go to the Fractional Pool. Do we need to worry about that shrinking?
BB: Great question! That number can vary from month to month. But what we do know is that the leading originators, Lending Club and Prosper, are investing heavily to make p2p investing more accessible for retail investors. What’s more is that they are investing heavily in technologies that allow companies like ours to make p2p investing safer, easier, more accessible and more profitable for the individual investor.
ST: We love hearing from our investors. If you have any questions, please don’t hesitate to reach out!