The Evolving Role of Peer-to-Peer Lending: A New Financing Alternative

INTRODUCTION P2P lending is the money transaction between unrelated individuals, or peers. Also known as lending, P2P lending has been around in some countries (e.g., China) for centuries, in which the underground market raises money between family and friends to supplement the insufficient financing from other channels. Contrary to traditional practice, P2P lending does not go through such financial intermediaries as banks. In the past two decades, the economy and financial markets of the United States have been highly volatile. Evidently the development in information technology (IT) and e-business brought overwhelming changes to the structure and operations in the world of business. Emerging IT developments promise improvements in productivity in a wide range of activities in many dimensions of the economy. Online P2P Lending is one of the innovative new financing models engineered by IT developments, and has gained increasing attention in the past few years. Specifically, online P2P lending refers to the process in which an unsecured loan is originated between private lenders and borrowers on online platforms. Relatively higher returns are associated with higher risks for the lenders, while the borrowers are also expected to pay higher interest rates in exchange for a quick and relatively easy loan application. The Online P2P model, powered by online platforms, is different from the stereotype offline model which was restricted to certain groups of individuals. Early this century, widely used personal computers and the Internet made it possible for lenders (investors) to independently utilize information technology. Infused by the rapid development of information technology and the associated increase in the popularity of social networks, online P2P lending has grown significantly. Characterized by disintermediation, this innovative financing model greatly reduced the importance of intermediaries and the related transaction costs. While the Internet extends the crowd sourcing to unlimited possibilities in matching lenders and borrowers, online P2P lending has its own share of problems and issues. For instance, online P2P lending does not normally require collaterals and attracts borrowers who are not qualified for traditional bank loans. Consequently, the lack of sufficient credit status of the borrower is associated with high credit risk and normally leads to high interest rates to lenders (investors). But the higher interest rates are also indicative of the exposure to higher default rates. On the other hand, online P2P lending is considered to be an investment and subject to the regulation by the Securities and Exchange Commission (SEC). In 2008, the SEC mandated that the companies offering platforms for online P2P lending need to register their offerings under the Securities Act of 1933. An investment, unlike deposit or savings in banks, is not protected by the Federal Deposit Insurance Corporation (FDIC). Evidently, the new financing channel introduced competition to the traditional financing institutions (e.g., banks). This teaching case intends to explore the new development in the finance industry from the perspectives of corporate disclosure, information system, and finance regulation. LENDINGCLUB LendingClub is a U.S. based online P2P lending company, with its headquarters located in San Francisco, California. Founded in 2006, LendingClub originated over $15.9 billion loans as of December 31, 2015. This new financing innovation employs a technology-powered online marketplace. Compared to the system used in a traditional banking system, the online system is believed to be a more efficient mechanism to allocate capital between borrowers and investors. From the borrowersu0027 perspective, individuals and small business owners borrow through LendingClub enjoy relatively lower costs and a better experience. On the other hand, individual lenders can earn higher returns that are normally only available to institutional investors. …