What’s in a name?

On Monday, I attended the Online Lending Policy Summit in Washington, D.C. As the name implies, it’s an event for policy wonks that’s hosted by the Online Lending Policy Institute, a trade association with the admirable goal of bringing transparency to regulatory decisions affecting the online lending sector.

Last year, their event was called the “MPL Policy Summit.” I didn’t attend, but from what I understand, it was the same event, just with a different name.

I arrived in D.C. after a 6 hour commute, just in time to hear a keynote from Keith Noreika, acting Comptroller of the Currency. This makes Keith the top administrator of the federal banking system. (BTW… I can call him “Keith” or I can call him “Noreika,”… it doesn’t matter, it’s the same guy, and you know who I’m talking about.)

Keith is a sharp guy and I liked what he had to say. But within a couple of minutes into his remarks, he used the phrases “online lending,” “marketplace lending,” and “P2P lending” to describe the same exact thing. That is, the business of lending money to people who fill out loan applications online.

About an hour later, Matt Burton, CEO of Orchard Platform, hinted at the same nomenclature problem when he kicked off his roundtable by asking panelists what people call this business overseas (since his panelists run companies outside of the U.S.). Matt helped them along by asking, “Online lending? Peer-to-peer?” Unfortunately, not a single panelist offered a clear answer. Which got me thinking… Maybe I should straighten out the industry jargon here?

I’m not looking to be the grammar police. But there are some notable differences between “online lending,” “peer-to-peer lending,” and “marketplace lending.”  So, I’m going to clarify things, based on the definitions we use at DealFlow, where we publish The Alternative Lending Report and a daily e-letter at www.AlternativeLending.io.

Online Lending

We use “online lending” as the catchall phrase to cover all areas of consumer and small business lending taking place on the Internet.  This includes direct lending (loaning off a company’s balance sheet), and it includes marketplace lending and peer-to-peer lending (discussed below).

When we first started compiling our Alternative Lending Directory, we had a stringent definition for “online lender” which included only companies that operated their entire funding process online.  Meaning, a borrower never has to speak with a human being during the whole process, from application to funding, it all takes place on the Internet.

We’ve since broadened our definition to include any company that has it’s loan application online or any company that defines itself as an online lender.  We realized that most of the companies who call themselves online lenders were really just processing the application online, and subsequently working through the applications offline.  In the SME loan space – which is our area of focus – each borrower is unique and as it turns out, much of the credit assessment and administration happens offline.

Because our definition of online lending includes marketplace lending and peer-to-peer companies, it’s perfectly appropriate to refer to any of these firms as online lenders.

Peer-to-Peer Lending

The online lending movement really started with peer-to-peer. The idea was to match borrowers with individual lenders through a website.  Peer-to-peer, P2P, or “crowdlending,” refer to the same concept whereby borrowers and lenders transact on a variety of loan types including student loans, real estate loans, business loans, and even payday loans.

The crux of P2P is that there’s no single lender. There’s a crowd of individual lenders and the P2P website plays matchmaker for a fee. Given this definition, it’s not appropriate to call companies like OnDeck Capital or Kabbage P2P lenders. OnDeck and Kabbage are direct lenders, providing loans from their own balance sheets. They aren’t playing matchmaker between borrowers and lenders, and they aren’t providing the public disclosures necessary to attract retail lenders to their platform.  It’s an entirely different business model.

Here’s a nomenclature shortcut:  If you want to know if a particular online lender is also a peer-to-peer lender, just look for the disclosures. To get retail money, you need the retail disclosures.

The P2P model has become much less popular over the years as institutional interest has poured into the space and provided a more permanent supply of capital. While there are many P2P lenders in Europe, there are far fewer in the U.S. Examples of peer-to-peer lenders operating domestically include companies like StreetShares, LendingClub, and Kiva.

Marketplace Lending

Marketplace lending, or “MPL,” is the jargon that seems to trip everyone up – including many people working in the industry!  MPL is not peer-to-peer. In fact, MPL should probably be called “marketplace brokering” because that’s what these marketplace lending websites do – they broker deals between borrowers and institutional lenders. Some MPLs do originate their their own loans but it’s a minority.

When thinking about where marketplace lenders fit into the spectrum of online lending, just consider whether the company is brokering deals outside of the retail P2P network. Examples of marketplace lenders include Lendio, Fundera, and IOU Financial.

Download all U.S. Online SME Lenders

If you’d like to see the entire universe of online lenders facilitating small business loans in the United States, you can download DealFlow’s “Alternative Lender Peer Group: Online Lenders.”  This is a super-useful resource listing 400 companies who are active in the U.S. market.

As always, if you’ve got questions (or if you think you’ve got better definitions than I have), just reach out to me.