It’s IPO day as the long awaited LendingClub public debut takes place. An operator of a peer to peer (P2P) lending marketplace, LendingClub is the leader among a new class of non-bank fintech alternatives for providing loans to borrowers. As a marketplace, the P2P structure allows borrowers to connect directly with investors for funding without the need for a bank intermediary. The results are improved efficiency in the way of decreased upfront borrowing costs and better rates for both borrowers and lender investors.
Competing directly with banks, the P2P lending space has become a hot area within the financial industry, as it has the potential to change the way the world borrows money. Initially viewed as a technology to bring microloans to the unbanked, P2P lending now attracts traditional bank borrowers who are finding that they can source favorable borrowing terms on the new marketplace. As a result of the long term potentials and current efficiency which has been established with P2P lending, the space has attracted investment from both venture funds as well as traditional banks.
Going public at $15 a share today, demand has pushed valuations for LendingClub stock above the $12-$14 range which had been floated by underwriters earlier this month. With a public float of 57.7 million shares, LendingClub raised $865.5 million to fund its future, with a valuation of $5.4 billion. For the fintech sector as a whole, the deal is expected to increase already bubble-like valuations further.
(Update: Shares opened higher and are currently trading at $23. So that’s now a $8.3B valuation for LendingClub)
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What is important for LendingClub and the overall fintech industry is that the market is valuing these firms more in-line with technology companies than financial institutions. As a result, investors are willing to place bets that the future of the way we do finance is changing, rather than on current bottom line results which is the typical driver of valuations of financial related IPOs.
Everything becoming P2P (AKA Exchanges)
One of the key trends emerging that fintech is bringing to the financial world is an increase of P2P marketplace. Connecting buyers and sellers on technology driven platforms, these new marketplaces are in essence an evolvement of the long standing exchange driven system.
Modern stock and derivatives exchanges were once gatherings for the sale of physical commodities and agricultural products. Those days may be gone with cattle replaced with cattle derivatives and shares of poultry conglomerates, but the underlying foundation of an exchange as a central marketplace has continued due to the operational efficiency they provide.
Beyond just P2P lending, the move towards the efficiency of centralized markets and platforms is also taking place among sophisticated derivatives such as swaps and options, where buyers can communicate with multiple dealers for the best prices. For banks, the centralized platforms mean trading desk profit is no longer directly linked to relationships with client but driven by who has the best pricing. Benefiting are customers who can leverage the transparency of centralized markets to source the best prices.
Elsewhere, P2P marketplaces are forming in cross-border payment transfers as well as in real estate and startup equity sales. The overriding theme has become that wherever there is inefficiency, high costs and a lack of transparency, P2P marketplaces are being formed to change the market and future of finance.