Is DeFi Lending Superior to P2P Lending?

This post was originally published on March 26, 2019, and sent to Messari Pro subscribers.

The other day I was reading a Twitter thread from Kyle Torpey, an analyst who’s been covering Bitcoin for years, who asserted that blockchainers (those building outside of Bitcoin) have generally failed to differentiate their products from traditional fin-tech applications.

Having covered fintech as a research analyst previously, my general reaction to the term “fintech” itself is negative. It’s become a buzzword for banks to use in marketing materials. A dirty word.

But early fintech companies had a common ethos: unbundle banking services and improve financial access to more users at lower costs. Something to truly strive for, and which should sound familiar to the crypto crowd.

One of the most exciting areas of fintech in its early days was peer-to-peer lending. Companies like Prosper and LendingClub launched innovative platforms that allowed individuals to bypass banks and receive loans from other individuals with the idea that previously excluded borrowers would be able to access credit to do things like pay down high-interest debt or cover emergency expenses. Borrowers, on the other hand, had the chance to earn a yield higher than what they could get in a savings account or money market fund. LendingClub launched in 2007 as a Facebook app that matched borrowers and lenders using a credit scoring system based on “pre-set criteria such as being Facebook friends, or being in the same network, group or geography.” SoFi got started by allowing Stanford alumni to lend money to current students or recent grads that wanted to refinance their business school loans at more competitive rates.

These early platforms showed that technology could offer alternatives to the traditional banking system and increase financial access for individuals. Of course, these companies also became targets. Regulators started asking why tech platforms were offering financial services without proper licensing, and reality kicked in. Prosper and LendingClub (the earliest lenders in the space) both temporarily suspended their programs to come into compliance with SEC regulations, beefed up their compliance teams, and complied with myriad state regulations. LendingClub later went public at a $5.4 billion valuation and started to focus on quarterly results, rather than the individuals on its platform. Hungry for new capital to fund loans, and collect fees, peer-to-peer lenders looked to banks for capital, ironically becoming yet another referral partner for the institutions they originally set out to disrupt. Catering to an institutional base led lenders to focus on high credit borrowers, moving away from those who most needed access to credit.