Off to his newest venture since leaving bond investing giant, PIMCO, in March, Mohamed El-Erian has moved to a different type of lending product; peer to peer (P2P) lending. El-Erian’s move into the P2P industry comes as he was reported by FT to be a lead investor in a $12 million equity raising round for lending platform Payoff. Founded in 2009, Payoff provides borrowers cash to pay off credit card and other high interest loans with favorable terms. The funds are part of Payoff’s new P2P model to incorporate accredited investors as lenders on the platform.
Similar to other P2P lending platforms, Payoff uses behavioral science data collected about borrowers to evaluate and rate borrowers. The process is similar to that of P2P lender, Kabbage, which uses merchant data such as inventory and sellers ratings to rate its business borrowers. Unlike Kabbage which offers services to business borrowers and most recently retail customers via its Karrot platform, Payoff will initially be focusing solely on the retail market.
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While P2P loans are still miniscule compared to that of the overall commercial and consumer lending market, they have been able to carve out a growing niche due to offering more favorable rates than those at banks. In an interview earlier this year with CNBC, Giles Andrews, CEO of UK-based P2P lender, Zopa, explained that their customers on the whole were able to access loans from traditional banks, but that people were coming to them for better rates.
What is interesting about Payoff’s P2P platform is that they are moving directly to accredited and institutional investors to provide liquidity for loans. This contrasts to other popular P2P platforms that are also open to retail investors. However, as proved in documents related to Lending Club’s planned IPO, retail lenders compose a small fraction of overall money being lent on the P2P platform. Funding is dominated by institutional investors such as hedge funds and pension funds that are flush with cash and view P2P platforms as an avenue to provide market-beating interest rates for their funds compared to yields available in bonds.
By excluding non-accredited investors from its platform, Payoff may be able to minimize fees associated with supporting smaller retail investors, which would in turn provide more attractive rates to borrowers. However, it also limits retail exposure of the P2P platform at a time when competition is increasing quickly in the sector, as satisfied retail investors may be willing to recommend Payoff to borrowers.