Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in ten years or less. My guest on today's show is Peter Renton. Peter is a world-class expert on the subject of marketplace lending, aka peer-to-peer lending.

He's the founder of Lend Academy and the LendIt Conference, and today he's here with us to share some knowledge and insight on the topic of the current state of marketplace lending. Peter Renton, welcome to Radical Personal Finance. Thanks, Joshua. Great to be here. We're going to talk about peer-to-peer investing, and based upon my research, I guess you're not the grandfather or the godfather of the industry, but you kind of got a place of prominence in this world.

How did you get into this peer-to-peer investing thing? Well, it's good to be first, isn't it? But I started – I first discovered peer-to-peer lending when I read an article. I think it was in Money magazine back in 2008, and I just sold my second company and was really looking for other investment ideas or alternative investment ideas, shall we say, particularly when I saw the stock market grow.

I saw the stock market crashing, and my all fixed income kind of went down to zero pretty much. So I was very much in the market for something new and discovered this. It was an article about Prosper. Unfortunately, Prosper, by the time I got around to doing something about it, was in a quiet period.

They were registering with the SEC, so I ended up going with Lending Club, and those two companies are still the two largest companies in the space. And I just started off – I started off with $500 and just wanted to make sure this was all legitimate, and it was.

And then I added $10,000 and then put my wife's retirement money in there, put a lot of my retirement money in there, and eventually now built it up into the mid-six figures. And I basically – what I noticed was that this was just – this was like a well-kept secret, it felt like to me, that there was a way to earn 8 to 10 percent on your money.

It was certainly not – it didn't have a long track record, but I felt the more research I did, the more I was convinced that this was a really good investment idea. So I started just investing my own money, and then what happened was I was really – I took a couple of years off after selling my second company and was looking for something new to sink my teeth into.

I really wanted to do something online, didn't want to have the flexibility to be able to work from anywhere. And I actually discovered a website for sale. I was sort of trolling some of the website like Flippa and those kinds of places to try and look for good ideas for – to buy a website.

And I discovered this Peter P. Lenning website there, and I thought, "Wow, that's something that I could really sink my teeth into because I love this space." And I love – I've always been a self-directed investor. I love investing, and I felt like there was enough going on in the space that I could really write about it and could maybe make a little bit of money with affiliate income, which was what this site was sort of based around.

But anyway, I sort of bought that site as a sort of a starting point. Didn't have a grand business plan but felt like – I just was very personally passionate about the space and felt like it had a lot of potential and so I thought I would just ride the wave.

So that was Lend Academy that you bought? Yeah. It wasn't Lend Academy. It wasn't branded Lend Academy. I rebranded it. But initially, it was called Social Lending Network. SocialLending.net was the original website. And I rebranded it to Lend Academy. It was actually – it was a year or two after I bought it.

I actually did the rebrand. But as I felt like social lending was becoming sort of – it was becoming less of how the industry was becoming known. So that's why – and my mission really is to spread the word and evangelize the industry. So I felt like teach people how to invest and teach people about the risks and about the rewards and I felt like Lend Academy was a good sort of brand to drive that forward.

And that fast forward, I mean you just finished up the Lend It conference, right? Mm-hmm. Which is the biggest. Is it the only or the biggest conference in the space right now? It's the biggest by a long margin. There's probably 8 or 10 conferences now in the space. But we just had 3,500 people in San Francisco last week and there's no other conference that's ever had more than I think 6 or 700.

So we are by far the largest in the space. And Lend It really began sort of an outgrowth of Lend Academy. I had some of my readers were saying we really should put on a conference. There's no conference in the space. And I thought well, I don't really know how to put on a conference and I thought I probably should work out how to do that.

And it just so happened I really was – it was January of 2013 and one of my New Year's resolutions that year was to put on a conference. And then I got contacted – just a total cold call from who are now my Lend It co-founders saying, "Hey, we've been reading Lend Academy.

We'd love you to be involved. We're going to put on a conference." So it all worked out very, very nicely. And we had a few phone calls, got together in person and decided this was – we worked together well. We liked each other and so we put on our first event.

It was June of 2013 in New York. And now we've had four Lend It USA conferences. We've had two in Europe. We've had two in China. And so we've kind of done – the three largest markets in the world for this industry are the UK, China and the US.

So they're the three places where we have kind of set up shop for Lend It in those places. Tell me about China. So China is fascinating. I find the country endlessly fascinating. It is by far the largest market in the world for this industry. In fact, you could put the rest of the world combined and it wouldn't even come close to what China is today.

Because the thing about China is that it doesn't have a robust banking system for the middle class. Like if you're in the West and you want to go buy a car or you want to go buy a house, if you've got a decent income, you've got decent credit, you can go do those things and you've been able to do those things for many years.

In China, it's really not the case. If you want to go – the banks in China predominantly look after the large Fortune 500-type companies, the government-run enterprises, those sorts of things. So there's been this huge void of credit and credit is something that all modern economies have really built themselves on.

The banking industry is one of the largest industries in the country. China just didn't have a robust banking system. So when peer-to-peer lending began, which was really – it began actually after really – it really started to get traction after it got traction in the US and UK. But it exploded because there's this massive pent-up demand in China for people who want to start a business, who want to buy a car, who want to gain credit of some kind.

So now you've got several thousand platforms in China and you've got some of the largest platforms doing billions of dollars every month in loans. So it's less regulated than the West and the Chinese government probably have been a little slow in implementing regulation. They're trying to sort of strike this balance.

They realize that this is actually a great thing for their economy, so they don't want to just shut it down. But it's such that the Chinese entrepreneurs have kind of done – they've done a lot of, shall we say, dubious things, which simply wouldn't be allowed in the West.

And so consequently, there's been a few teething problems we've had. There's also been outright fraud in China that we haven't had in the West. But it's going to be a large part of – I think the whole sort of lending industry in China is going to be more based around peer-to-peer than what we see in other countries simply because there's a massive void there.

You said there are several thousand platforms operating in China right now? That is remarkable. And I guess I had – I wasn't even considering this. I am a neophyte in this space. And I assumed, okay, it's growing. But I had no idea of what you just told me about China.

I'd love – I didn't intend to go here, but I'm just so interested as far as the regulation perspective. So generally I'm – so politically speaking, I'm largely libertarian. And so I prefer to see minimal interference, minimal bureaucratic regulation in markets and just a maximum the actual market itself working it out.

Is China providing that type of space or are the regulators interfering just enough? But are they interfering in the market working its way out, dealing with the fraud, figuring out market solutions, and they're just simply doing it less in the United States? Like what are you seeing when you look at this new market?

Well, first let me just back up a second and say in the West, in the United States for example, we have – there's been strong banking regulation, some would say too strong. But there's been a lot of consumer protections built into the banking system. And all of the lending platforms in the US have to adhere to those same fair lending regulations that any bank would have to adhere to.

So in the US, we've got a lot of – and then on the investor side, we've got a whole SEC regulation. So both sides of the marketplace are regulated fairly strongly in the US, UK, and other Western countries. In China, there's just – because there wasn't – there hasn't been a real lending industry for the middle class.

There just simply was a void, a complete void of regulation. And so it was – so consequently, I mean you could start – I've been into China several times. And I was chatting with someone on my visit there a couple of months ago that they said, yeah, you can start – it was 1,000 renminbi, which is the equivalent of about I think that's – so $16, $160 shall we say.

$160 roughly will get you started and get you a lending platform established in China. You've got to register. Everything is done on a phone, on a smartphone. So you need an app and you've got to register your app that costs like $10 and you've got to build the app and that costs like $150.

So that's kind of how easy it has been to get started. And the fact there isn't a strong regulatory environment, it's meant that people could – like the big fraud that was done was actually the second largest Ponzi scheme of all time after the Madoff Ponzi scheme. So it was – the $7.6 billion were lost to investors with one of the top ten largest platforms, which people who are following industry really closely had suspicions.

But there's plenty of people who they fooled into thinking that this was a legitimate business, but 95 percent of the borrowers on this platform called Yizhoubao were fictitious. So these – and the founders just pocketed the money. And the average investor in China, we need to point out, is less sophisticated than the average investor in other countries and simply because this generation of Chinese are really the first generation to have disposable income to invest.

So where – and it just isn't sort of the whole industry of financial advice that's really well established in the West that isn't there in China. So the concern is that I think that the government – like governments in a lot of places, they tend to overreact whenever there's something like that.

Bernie Madoff sort of caused a whole scheme of regulations along with the financial crisis in general. But so that – there are regulations on the table. Some of them the industry supports wholeheartedly. Some are a little more onerous, and I think we're probably going to find that the Chinese will come down with a set of regulations that will probably err on the side of being a little too strict than not strict enough because they don't want to see those kinds of – that kind of fraud happening on a regular basis.

It's – if I had time or if I were willing to make the time, I would love to study that market. That would be just a fascinating academic political science and international business study to make. That just intrigues me to no end. I didn't intend to go into that, but that intrigues me to no end.

So here's what I would like to do to get back to more of a mainstream peer-to-peer topic. I don't want this show to be a primer, but I also do want to lay out the subject, and I want you to use me. I'm just going to be me, not just Joshua Sheets the person, not Joshua Sheets the podcast host.

And simply say this. I've never invested in a peer-to-peer platform, nor have I ever borrowed money from a peer-to-peer platform. But I'm probably a fairly good candidate. I have investable assets for various personal reasons. I have withdrawn from participating in – at the moment I've withdrawn from participating in the public and trade securities markets.

So I am investing privately and actively seeking new investment opportunities, and peer-to-peer could possibly fit my own personal investment profile. So to begin with, I'd like you to make the case to me that I should take some cash out of a savings account and start investing in peer-to-peer. How would you make that case to me?

Sure. So firstly, there's several kind of sub-markets of the peer-to-peer sector we've got, and it's called marketplace lending now. It's not really driven now by individuals lending to individuals, although that was the beginning. So there is consumer loans, there are small business loans, and there is real estate. And I'm going to start with consumer loans.

That's by far the largest and the most established segment, and there are two main players, Lending Club and Prosper. So you might think – and these are unsecured consumer loans. So you are basically going to loan money to people, and their only incentive to pay you back other than doing the right thing is that their credit – these are – their credit score will be damaged if they don't.

These are loans – these companies all report to the major credit bureaus. So if you don't pay back this loan, then you will find your credit will be tarnished dramatically. So let's just look at consumer credit. If you go back over the last 30, 40 years, consumer credit has been a fantastic asset class.

It just has never been available to individual investors. It's been available to large institutional investors and banks. I mean credit cards are tremendously profitable for the banks, and they – because people, even when they're – even in recession, people still use their credit cards. People still pay back their credit card, and you'll see that there's – if you go back and there's data from the Federal Reserve, and people look at delinquencies and actual charge-offs.

And charge-offs in a recession tend to obviously go up. They – it varies, but you're talking about two to three times typically the charge-offs for credit cards, and that's three times being the financial crisis, which is obviously not a typical recession. So my point is that consumer credit is an established asset class.

It's got a long track record. It has a very – it's also non-correlated for the most part. It's correlated most heavily with the unemployment rate. So if the unemployment rate goes up, defaults go up. So it's not a completely uncorrelated asset class because obviously unemployment goes up, probably the stock market's going down, and other things are going down as well.

But my point is that you can get today 7 or 8 percent relatively easily, and obviously you don't earn 7 or 8 percent without risk. These are unsecured loans. But my personal feeling is that you are – as an investor in Lending Club or Prosper Loans, you are being overly compensated for the risk that you are taking.

That is my personal feeling because there has been – and keep in mind, both these companies started before the financial crisis. So they were very small when 2008, 2009 happened, but they have a track record that takes them through that, and you can actually look and see how their loans performed.

And what the point is also to make is that these companies have since improved their credit models many times since then. So even if you repeated exactly what happened in 2008, and Lending Club had a positive – throughout the financial crisis, Lending Club provided a positive return to investors.

Prosper provided a negative return mainly because they were much looser in their underwriting. They went down to 520 FICO. Now, that's 640 FICO. So if you take out those lower – those higher-risk loans, lower FICO score loans, Prosper did very well during the financial crisis as well. So you're talking about 7 to 8 percent return and relatively uncorrelated.

And if defaults – if we get another financial crisis, most people have modeled this out, and they're looking at maybe a 2 to 4 percent return would be expected in another 2008, 2009. So tell me another asset class that can deliver positive returns during a major recession. And that's why I'm so bullish and I continue to put new money to work in this asset class.

It's an interesting case. So, I mean frankly, here's the fear that I have. It all feels very much like a Ponzi scheme in this way. I'm not accusing there of being a regulated, orderly – I'm not accusing there of being a conspiracy that five individuals have gotten together and said let's perpetrate this scheme.

Rather, I love the concept and I want to see this grow and grow because one of the major trends for liberty and freedom is that individuals having the ability to access other individuals. So I love the concept. My biggest concern is constantly that people who are involved in promoting marketplace lending are always leading with returns and they're always talking about, "Hey, here are my returns.

Here are my returns." And it feels like – now part of that is usually due to the fact that people want to know the returns. That's the number one question that I'm going to ask is a return. So, I mean people are leading with returns because that's the number one question they're being asked.

I like to ask, "Okay, what are the returns?" But also usually what's happening is that the person, whether it's your site or whether it's someone who's writing a review on their blog, they're leading with an affiliate link to Lending Club or Prosper. And so this is one of the most profitable ways to – this is one of the most profitable ways to monetize your blog.

Let me write an article on my Lending Club or my Prosper returns and then let me post my affiliate link to Lending Club or Prosper. And that way after you see my returns, you'll go ahead and buy it. Now, I am not – I don't argue against that business model.

I think it's totally fine for companies to have commissions. I think it's great for entrepreneurs to do this. So, I'm not unhappy with either the business model of returns. I'm not unhappy with people writing a blog. I love that your blog and many thousands and thousands of others can do this.

But it all very much feels like a gold rush and everyone kind of rushing in. And maybe I'm just too conservative of a person. But when something is as popular as this is where everyone is sending money over and in your site, you talk about the risks and you go much deeper, it just gives me a bad feeling.

And I don't know whether I'm being irrational and simply responding emotionally or whether I'm actually sensing something that should be giving me pause. How do you respond? Right. So, I mean it's fair. I mean it's good to have a skeptical approach to anything new like this. And I was in your shoes eight years ago when I first kind of started coming and came across this.

And, yeah, so I think a couple of things. So, firstly, yes, there are plenty of people writing about their returns. I mean I read every single one of these reviews that comes out and most of the time they're just regurgitating others and there's nothing really new. And I also get annoyed when people say, "Look at my returns.

They're 15 percent. This is fantastic." And 15 percent is easy when you haven't had the impact. If you've got a six-month-old account and you've had one or two defaults or zero defaults and you've invested in loans that are 15 percent. So, your returns can be artificially high and it's one of the things I talk about quite a bit.

So, I always look out for that. But I think as far as the popularity of the space, it is like Lending Club went public about 18 months ago. And they've been basically operating with all the transparency that's necessary to operate a public company with. And so people have a really good idea on not just on the investment concept but the actual businesses themselves and how they make money and whether this is really a sustainable business.

And that's a whole other – like the valuations is a whole other story that we can get into if you like. But my point is that a Ponzi scheme is something that is – you take money in and you pay money out with – you pay people who want to exit out with the money that you take in.

And that – there's just simply nothing like that happening. And you – I mean you can go through every single loan at Lending Club is an official security registered with the SEC. You can go and audit this stuff for yourself. Lending Club provide and Prosper provide their entire loan book to investors to basically analyze.

And it's – I mean one of the reasons they do that is because they know people are skeptical and they want people to be comfortable. And there are not just people like you. There are also hedge funds. There's pension funds. There's investors who want to put $500 million to work.

And you think that they're going to do some pretty serious due diligence before they do that. And I go back to the point that I think this industry is still being mispriced for the risk that you are taking. And I think that is something that – I mean interest rates have been coming down.

Like when I first started getting into it, I didn't say 7% or 8% returns. I said 10% to 12% returns because that was what was on offer. And even in fact when I first joined, Lending Club advertised on their site their average return was 10 – I still remember it was 10.68% was the average investor return at Lending Club.

Since then, interest rates have come down dramatically on the platforms simply because back in the early days, they needed investors. Much more than they needed borrowers. They had to have high returns. Now, they don't need investors as much. So the platforms for the most part have dropped their interest rates over the last several years.

And so what used to be a 10% or 12% return is now a 7% or 8% return. But it's still – as I said many times already, there's still I think a return that is more than compensating you for the risk you're taking. Sure. And I want to clarify for your sake and also for the audience.

I do not accuse this of being a Ponzi scheme. It's not. I can't find no evidence of it. Simply saying that when everybody jumps on something, I have this visceral reaction. When something becomes popular, I want out. Now, is that good, bad? Who knows? That's just a personal character trait.

Everyone starts driving this type of car. I don't want it. And so obviously that can be a bad character trait. But having watched the lending – having watched this marketplace lending grow, I've just watched it and just said, "Well, everyone else is going to put a link on their website to prosper in lending club.

So I'm not going to do it." Well, I'll tell you what. If you go outside of the financial blogger community who all obviously know this industry quite well now, you go to poll 100 of your friends who's heard of lending club, who's heard of peer-to-peer lending, and I think you'll find less than 5% of people will have heard of it.

It's still – I mean it's not mainstream by any stretch of the imagination and it is – well, in the financial blogger community, it's popular. In the general population, it is not popular. In fact, it is basically being ignored still by the general population and so I – and this was one of my missions and I hope to see this through eventually.

I think it will not be ignored but it's still as far as individual investors go, lending clubs have 100,000 individual investors. I mean how many individual investors does Vanguard have or does Schwab have or Fidelity? I mean you're still talking around – you're still talking a very small part of the whole kind of investing equation and it's represented by this industry.

You are right and I fully acknowledge and concede you have a stronger argument on this point. The market penetration is tiny. Fully acknowledged. I want to go back to the categories you said though. The three categories, I'm most interested not in consumer lending because that's the most popular. I'm most interested in category two, business lending, small business lending and category three, real estate lending.

What is happening in those categories with regard to marketplace lending at the moment? Sure. So small business lending is I think – it's actually my favorite category personally because I really like supporting small business. I feel like small businesses have been hard done by since the financial crisis and even really before the financial crisis in many ways with – banks don't want to lend and you have to be a really, really established business with a tremendous amount of track record to even consider an SBA loan from – and this is basically what banks are offering for the most part is a loan backed by the SBA.

If you don't qualify for that, then you have – you go to the alternative lenders and this is some – it's basically filling a massive void and that's why I really like it. Now, for the most part, you have to be an accredited investor to participate. It's one of the things that the SEC has kind of decided that Lending Club and Prosper, you don't need to be an accredited investor.

There are investor requirements but they're much less onerous than being an accredited investor. There is one small business lending platform that allows you to be non-accredited called StreetShares, streetshares.com. They're a relatively new platform. I like those guys a lot and they have – they've basically built a way for everyday investors to help – to basically lend money to small businesses.

They're started by military veterans so they've got a very strong military focus. A lot of their loans are to veteran-owned businesses but they're one example. If you're a non-accredited investor and listening to this, that's pretty much the only game in town in small business lending. Eventually, there will be more but the SEC is pretty – they don't consider this asset class to be something that should be open to everybody yet.

Now, the Jobs Act has sort of helped bring about some changes here but we're still a long way away from having everybody be able to invest. Real estate, again, there's a couple of options for non-accredited investors. Give us the options, please, for real estate. Give us the options for those who are accredited investors.

So accredited investors, they have – well, as far as – I write about it on my blog. There's a small business loan – a small business lending fund that I invest in which is for accredited investors called Direct Lending Investments. You Google that and you'll find them and I've written about them.

I personally have invested in them. Again, they have pretty high minimums. There are – as far as other small business platforms, most of them are really not interested in the individual at all. Small business platforms, there's – like there's another one that I've invested in personally, P2BI. It's the letter P, the number 2, BI.com.

That's P2BI Investor. They do invoice factoring and lines of credit for small business. They're available to accredited investors as well, individual investors and they have – and I've invested there. There's – they're the really – the main options you've got. Others that have funding circle, again, you can – funding circle is probably the leading small business platform that has a marketplace.

Again, they're accredited investor only and you – they probably have more – they're more established. They do what they've done over – they're a global company. They've started in the UK and they're ones that accredited investors can – there's more loan volume probably on funding circle than the other platforms that I've mentioned and they're able to – you can be diversified relatively easily on those.

Most of the others, you know, really are focused on institutional investors. Real estate is a little different. Real estate, there is a lot of companies out there focusing on individual investors because real estate is something that there's a lot of people comfortable with. I mean there's millions of real – I don't know if there are millions.

Anyway, there's a lot of real estate investors in this country who have bought real estate either by themselves or they might have bought it in a REIT or something but they're very comfortable with real estate and it's something that – you know, it's easy to understand. You can explain real estate investing to a 6-year-old and they'll get it.

You know, that – so real estate, there's – I would say there's dozens of platforms. I sort of – I just did a – on Lend Academy, we did a rundown of what we consider to be the top five platforms in the space today. Lending Home, which is just getting started, they've really focused on individual investors.

On Institutional, they're now just getting started with individual investors. You know, there's RealtyShares. There's ShareStates. There's Patch of Land and there's another one that I am not thinking about right now, Patch of Land. Anyway, there's Pierce Street. There's another one that I've actually – I'm just starting an investment in myself personally.

So there's – and there's several others as well. Realty Mogul, that's the other one that is also a very well-established player. These all – you know, you offer – a lot of them have like $5,000 minimums, 5,000 minimum – usually minimum per deal. So if you want to be diversified, you need to put in a bit more than that.

But it's a great way to invest in the fix and flip market if you don't really want to do a fix and flip because a lot of these platforms started in that way. Others have moved into office buildings, shopping malls, multifamily residential. There's all kinds of different ways. You can build a complete diversified real estate portfolio today through these online platforms.

Wow. Fascinating. It's – I'm ignorant of the offerings here. So I've got a lot of homework to do in this space because it definitely interests me. Are you seeing anybody take this concept to a localized level? Yeah, particularly in the small business space, there are some – and even in this real estate space, I mean, there – these real estate platforms often have a couple of different geographies where they focus.

But in the small business space, it's – I think it's hard to get track because it's – these are still pretty new. I mean, online lending in the small business space is actually – entrepreneurs now are – have a lot more awareness than the average consumer does, than even the average real estate investor does I think because these – there's a lot of well-established players.

A company like OnDeck, which is now a public company as well, been around since 2007. And they do typically short-term duration loans. They're now expanding into some of the longer-term loans. They've just signed a deal with Chase. So if you're a Chase small business customer, they just launched it literally this month where if you're a Chase small business customer, you can now go and obtain credit, which is powered by OnDeck.

OnDeck does the underwriting. OnDeck services loans. OnDeck provides the technology to Chase to really drive the whole process. So from a borrower's perspective, the small business loan lending is becoming more and more accepted, and there's – these platforms are all growing very fast as – as I said, there's a void in small business lending that is being filled and being filled rather quickly by these small business platforms.

Tell me about the profitability of the companies involved, starting with LendingGlove and Prosper and then other companies who have been jumping in. Are they profitable? Sure. Well, LendingGlove is profitable. It's not – it hasn't been focused on bottom-line profits. It actually turned to profit – quarterly profits for the first time several years ago.

But they have been trying to grow dramatically. An important metric that people look at is sort of their sales and marketing costs, and they have been going down per dollar loaned fairly consistently over the last several quarters. You go back – LendingGlove have all their – have their earnings calls on their website, which you can go and listen to, and all these equity analysts can – they will ask all kinds of questions about the finances of LendingGlove, specifically OnDeck as well because they're a public company, have the same thing.

OnDeck is not profitable. I think both these companies could be if they – LendingGlove is profitable slightly. It's not – it hasn't created a massive profit. But if they didn't want to grow so fast – and these companies are growing between 60, 70, 100 percent a year even. And so if they didn't need to – if they didn't want to grow that fast, they would all be turning a profit.

But they're – what they're trying to do – they're hiring people before they need them. They've got a lot of infrastructure that they kind of build before so they can keep scaling sort of thing. If they were just happy where they were, they could stop sort of investing in a lot of the future infrastructure, whether it be engineers or hardware, and they would be able to be a lot more profitable.

But in general, this is one of the knocks on the space. One of the valuations have been like LendingGlove IPO at $15 was run up to $29 and now trades around $8. And so people have said that – the markets seem to think that the profitability of these companies is not going to be as great as probably some of the people who dived in early thought.

I personally – I should – full disclosure, I am an equity investor in both OnDeck and LendingGlove. I'm also – I'm very bullish on the space. This is my career. So I'm – everything – I'm not – I'm certainly not impartial with anything that I say in this interview.

But I feel like I also understand the space well. I think – my feeling is why I'm so bullish is that I think more and more lending is going to be done inside a marketplace type format. It's a more efficient way. LendingGlove have a famous slide they produce and look at banks and the cost of lending to banks and their cost of lending.

And it's usually like half what a bank has to pay. And then another thing I just want to say that was fascinating to me when I first saw this, one of those – there's an analyst in the UK that brought this to my attention who is – he's been following the space longer than anybody.

And he showed me this graph of the efficiency gains basically per $100,000 loaned in the financial industry. And you look – you go 100 years back and the cost to get that $100,000 to a borrower and it's basically flat over 100 years. So there's been virtually zero efficiency gains in financial services when it comes to lending over 100 years.

I mean I don't know if there's any other industry that has had zero productivity gains in – over the last 100 years. I mean that was staggering to me. And that was really the thing that I think convincing more than ever that this is inevitable. The way forward is this online marketplace that is just a more efficient way of taking money from an investor to a borrower.

And banks have had this – have had it for a long time, and now I think marketplaces are going to be the way of the future. Frankly, whether you know it or not, Peter, you're pushing my sales buttons that I would be – I would so desperately love to see the banking cartels in the United States of America driven to their knees.

That if for nothing else I may start investing just to promote it because it's – this is – it's just a wonderful – it's a wonderful change and it's a wonderful growth factor. The biggest concern I would have as an investor in some of these companies is simply the same technology that is disruptive is more easily disrupted.

And that's I think the fundamental economic problem that so many of us are grappling with to say, okay, we can break apart 100-year-old industries with disruptions. But then how does a company build a moat around itself in this newly disrupted space where they're not – so that they don't face the same thing?

And the only solution I know is for them to continue to be a leader and to continue innovating and to continue adjusting it. But what can happen is if Chase Bank brings their pocketbooks into one of these things, into OnDeck if that's the case study, then now all of a sudden it will buy – they'll just buy out – they'll buy it out.

It's a possibility. It's a fascinating world to me, but at the end of the day, I love seeing openness come. I love seeing the investors win. I love seeing some of these changes happen. Yeah, and it's a very good point, and I think this is one of the things that – the other things that equity analysts are saying that Lending Club, it's just – it doesn't have a strong enough – a strong defensible position against new innovators that are yet to even get started.

And in their answer, I mean – the answer that the CEO gives to this is that they – one of their largest assets is their track record. They have a track – and when I say track record, the actual investor returns on the loans that they have underwritten. And you can go back and you can take their loan book of the 1.2 million loans that they have done, and you can see how they've performed, and you can even look at how – what the trend is of that performance has been.

So that's a big asset that is impossible to duplicate with a startup. And you – so you've got that. You've also got – as I say, they've got to innovate, and they've got a brand. Lending Club is really very brand-focused, brand-conscious. I mean if you were at LendIt last week, you would have seen 50 or more people wearing these red vests, which is Lending Club red.

And they're very – you can spot them all around the conference, and you knew that's a Lending Club person. Their booth was very well-branded, and they are, I think, doing a lot of good things when it comes to their brand, and I think that's something that they're investing in that is also going to provide a little bit of a moat.

But to your point, if someone comes along and does it better and cheaper and has a better mousetrap, then there's – we're basically talking about dollars. This is – a dollar is a dollar. It doesn't matter where you get it from as a borrower. You just want to get the – you want the cheapest money with combined with a good user experience.

A lot of people aren't willing to put up with a bad user experience in order to get cheap money, but if you get – that combination and good user experience obviously means ease of getting a loan and speed and that sort of thing. But someone can do it quicker and better and cheaper, then they will win.

I personally think that the future of this industry is such that the largest company in 10 years' time may well not be – may well not have started yet. We've got to be open to that possibility that there's someone going to come along and just do it better. But I think that the innovation that's happening – I mean lending has had such little innovation.

I mean the innovations that lending has had are securitizations and then look what – and pooling investments and then making them so opaque that no one really knows what's in them and then have it all fall apart. That's what we've had for lending innovation in this country. It's been on the opposite end.

We've had no doc loans in the mid-2000s that was – people thought was lending innovation but turned out to be a really bad idea. And so now what we're getting I think is true sustainable lending innovation. The companies that were at LendIt last week are really doing things that have never been done before that are really moving this industry forward.

And I think – I'm personally very excited about it and I think we're seeing things – I mean borrowing money is going to be so different in five years' time, even than it is today. And today it was very different than it was five years ago. And I think the pace of change is rapid and I think that this is going to be a great thing.

It's like someone said – I think it was Peter Thiel who was a keynote speaker at our conference said, the famous entrepreneur and investor said that Uber didn't disrupt taxis. Uber expanded the market dramatically. Whereas if you – ordinarily, I'm a perfect example of this. I was in San Francisco and thought, "Let's go up and let's go and see – go to this park." I didn't have a car.

I got an Uber down to this park and wandered around. I just wouldn't have gone to that park if Uber didn't exist. I would have just said, "I'll just wander around San Francisco and do something else." But the fact that I knew in five minutes I get a car to take me directly to this park and it was going to cost me $10, that's something that I'm doing – I'm willing to do.

So what Uber has done is dramatically expanded the market for transportation and what this – what marketplace lending can do is dramatically expand the market for credit. So those small business owners that say, "I don't have time to access credit. I really can't be bothered," or the person who wants to go and buy another house that says, "I really – I can't really access credit because my credit score isn't quite good enough." Those are sort of things that this industry is really going to innovate on and it's going to expand the pie dramatically.

Yeah. I share your enthusiasm. It makes me – I was sitting here listening to you talk saying, "Wow, this would be such a fun industry to be involved in. Maybe I'll go work with Peter and – " Come on board. "And be involved." There will be – there's always going to be a cultural lag between the technology capability and the cultural comfort of the people involved, and I'll use two examples to illustrate it, both personal to me.

One is simply that I have never had a long-term relationship with a personal banker. I'm 30 years old, and I've never had a long-term relationship with a bank that has a physical presence. Since the time I was about 15 years old, I've always had my banking accounts with USAA, which is based out in Texas.

And before even the ability of doing smartphone apps, I would always just mail my checks out to Texas, and then they would just pay a fee for using other banks' infrastructures. They don't have any physical locations. So the only two times I've ever engaged in a local business banking relationship have been miserable.

And so culturally, I'm 30. I'm an active adult engaged in the – going into the peak engagement of my business dealings, and I've never dealt with somebody locally. So for me, the thought process of going to see a banker, it's like I don't even want to do it because even the experience I've had with the two banking institutions that I've worked with locally were miserable experiences, and I know I can get better.

That is partly an age thing, but as older members of the workforce who start to move out and more and more people like me enter into our 30s, 40s, people who have never participated, that changes – that cultural change impacts dramatically. So that's going to be a big factor in this space.

The second thing is even those who don't have the culture that I have – and I'm sharing these just to encourage the audience to pay attention to their own experiences and notice the parallels. So even people who don't have the same cultural experience that I have of being younger, a little bit more comfortable, having – being accustomed to mobile technology, et cetera, I see it happening at every age.

In my social group here, in my church group, which is a diverse age, I can go back a few years and I can point and see, okay, there were the few early adopters that had smartphones. But today, there's not a single person who doesn't have a smartphone of any age.

Now, whether or not they know how to use them or not, that depends. But a few years of having it leads to people being more accustomed to it. So two years from now, I mean we're in an exponential – we're in a period of exponential change where two years from now, all those people who have become comfortable with the basic functionality of having a smartphone for the last two years, now they'll go from having one app to having 100 apps.

And that cultural change is happening faster than anybody can experience. So when you add these two factors on of an aging population and how fast, exponentially fast the culture is changing across all age brackets, it leads to – it's going to lead to – from 100,000 investors to many, many more.

It's going to lead to – yes, it'll appear slow. But underneath the slow appearance, there's a massive change happening in the population of where people are going to go for loans. So you're – hey, you're selling picks and shovels to minors, Peter, and you are well positioned for a third fortune hopefully.

Well, yes, let's hope. But I think what you pointed to are two of the major tailwinds of the industry, and I think – I've talked about this a lot. The demographic shift, it's hard to overstate how much this is going to impact banking. People like yourself who just don't have a relationship with a traditional bank and even those people your age who do have a relationship generally don't have a positive one.

So they – this is a massive – it's a massive tailwind. These people are open to alternatives, and they want to be able to borrow money from an alternative lender if all the other things are equal. They would choose that for – a lot of people would. And they're also – I mean like you go to – you can't take out a loan online at any of the major banks.

I mean Chase are now doing it with their small business product because they're partnering with OnDeck, who's a company that knows how to do online lending. But banks, large banks for the most part don't know how to do that. And it's – and talk about a cultural shift. I mean banks are not rewarded for really innovating in the – no one's going to get fired for not starting up an online lending operation in their bank.

And I think it's – they've got – not just got the legacy technology inside large banks, but there's the legacy employees who aren't real risk-takers and aren't looking to try and embrace the next new wave. So I think that's – banks have really going to – I mean I think the Chase – Jamie Dimon to his credit, I think the CEO of Chase has recognized this before some of his counterparts.

And he's – and he started this partnership with OnDeck. It's quite possible that OnDeck will be bought by Chase. In fact, someone said that at the conference that they expect that will happen by the end of this year. But that's total conjecture and I've got – we've got obviously no information on that.

But if it goes well for Chase, it's hard to imagine Chase not jumping on board and really having a much deeper relationship with OnDeck. And that's the sort of thing that banks may go and enter this space through that. And hopefully, when and if they do that, they will leave the culture in place at the online lending platform so they can keep innovating and keep – and really keep pushing the ball forward.

So I think that's – the other real massive tailwind is all of the baby boomers entering their retirement years. They need yield on their investments. Fixed income is – it's still terrible for – and who wants to invest in bonds when we know that the next rates are only going to go up?

We thought they'd have gone up further by now, but we had the San Francisco Fed President talk at LendIt last week and he expects two to three interest rate increases this year still. So interest rates are potentially going up in the short and near term. And so this is – fixed income is a real issue for retirees and this asset class provides that.

And the one thing that's the knock on this industry where we haven't done well enough yet is providing investment vehicles that are easy for people to use. There is no mutual fund yet for this industry. It should be happening this year. It was supposed to happen last year, but the SEC being – they're certainly providing some challenges to getting those off the ground.

And until you can check a box on your 401(k) that says invest in marketplace lending, this industry is still going to be for the hobbyists and the early adopters. We need investment vehicles that you can just go and do – go in so easily and just invest in the asset class.

That right now, if you want to go and invest in Lending Club, we have – I can give a plug to my sister company, NSR Invest, which is basically a registered investment advisor totally focused on this space that takes people through this process painlessly. But NSR Invest is no Schwab or Fidelity and at least not yet.

But that's – until we get a Schwab or Fidelity coming on board and with a mutual fund, this industry is not going to be mainstream because those retirees, you're skeptical. You're 30 years old. Someone who's 65 years old is often much more skeptical. And if they see something from a Schwab or Fidelity, they might trust that.

So I feel those are the things that really need to happen to really get the industry going mainstream. You stole the next question that was going to be out of my mouth was what's going to – where are we at in this process? And you kind of answered it.

So let me give you – this is just us sitting down over a cold drink, this type of discussion, not giving advice to people. But I'm just kind of watching it how I see industries work. So here's how it seems to me. As I understand it, in the workings of markets, the market rewards efficiency.

And one of the biggest things that can happen is simply that in time, markets become efficient. So let's look at the world of just mainstream stocks, mainstream large US stock market, large US equities. In this marketplace, it used to be you had a very inefficient market. Historically, you had the stock market was people coming down to – what was that?

Square in New England and sit down and trading shares of their paper. It wasn't open to many people. It wasn't – it was a very thin market. And so you could buy and sell shares of a company. Well, the market develops. It grows over time. People start to be participating in it.

You go back historically. There was a time at which it was very, very rare for any US American to be involved in the stock market. Those who were involved in the stock market, they were involved in owning individual stocks. They would read the stock section. They had their companies that they liked, and they would just sit back and collect the dividends, Coca-Cola, whatever, General Motors, whatever.

It doesn't matter. Then you had kind of the commoditization of the stock market because there was an opportunity for people to earn money based upon selling stocks. Then you had the development of the mutual fund industry. The mutual fund industry led to the marketplace being heavily scrutinized, which took the marketplace from a place of relative inefficiency to a place of relative efficiency.

And so today you can still invest, but basically all of the academic research would say the vast majority of people should simply purchase some sort of passive investment fund or passive investment vehicle simply given that the efficiency has been driven by the market. The market has become very efficient.

Are there still pockets of inefficiency? Sure, there probably are. Not open to the normal person. We expect the capital market to work well. It prices companies appropriately, et cetera. But along the way, the returns have been driven down. And so you first had – people used to be able to make a lot of money by investing in stocks.

Now you – then the big people that made a lot of money were those who sold investments in stocks, the financial companies. Well, now it feels to me sometimes like we're almost going into another phase where you just have this market that's there and it's somewhat dependable, but no one is going to get all that rich.

It's hard to imagine somebody being able to build another huge company that's going to bring huge innovation to it because there's so much money and so much innovation there. And so now you have people leaving and going in search of new markets. So now is that technically accurate? Probably not.

I'm not ready to present that as a carefully researched paper. It's just kind of the way that it looks in my mind. And most analysts in the mainstream US-based stock market are predicting lower returns in the future. And so portfolio managers, that's why there's been a look to other markets, emerging markets, which are probably less efficient, can find more deals.

Or that's also why there's been so much more focus on small cap and micro cap investing, less efficient markets, possibility for higher returns. So it feels like we're going to go through the same type of thing though with regard to peer-to-peer. You have – and I don't know where we are in this stage, probably very early.

But it almost feels to me like we're going to go through exactly the same thing just like most markets do where there's a disruptive innovation that attracts a lot of attention. Now you've got hundreds and thousands of companies coming here. It's going to disrupt the market. There are returns, but returns have been dropping as the risk is reduced.

The returns for investors has been dropping. It's going to go next to the mainstream appeal. So frankly, Peter, after listening to this conversation, I'm not thinking how can I open an account with Lending Club or Prosper. I'm thinking how can I invest in a small – I need to do my research and figure out how to invest in a small up-and-coming platform so that I can be an owner of the platform because – I don't know if this is accurate.

But it feels to me like we're at the stage now where I want to own the mutual fund company. I don't want to own the stocks. If anything, I want to own the mutual fund company. And then over time, this market will become the standard thing where everyone buys and sells in this marketplace, and the big banks are competing there just with the little banks and just with the individuals.

And it's a much more broad and open, flatter market, which is the benefit of the connectivity of the internet. I'm curious. That's just me kind of off the cuff thinking it through as we've been talking. Do you think I'm right? Do you think I'm wrong? What would be your response to that illustration?

Yes. So a couple of things. So I think we are in the very early days of this industry. I mean people talk about what inning we're in. I mean I think – I was having this discussion with the president of PROSPER the other night who seemed – I argued we were still in like the second or third inning.

He thought we were in like the fourth or fifth. Anyway, we're early relative to where this industry is going to go. And it all depends what your goal is. If your goal is a stable return that can produce 7% or even say 6%, when inflation is below 2%, that is a decent return that I think most retirees would be very happy with.

But if you want to double your money in the next three years, then this fixed income is just not for you unless you want to invest in like I said like the equity of some of the companies. There are certainly going to be some major success stories. I mean we had a person who invested in Lending Club when they – I have a friend who had the opportunity to invest in Lending Club at a $70 million valuation.

Right now, it's at roughly $3 billion valuation. So that would have been a very nice return and that was just six years ago. So you're not getting 10X on your money. You're getting close to 50X, that kind of thing. So those are the ways that you can have a good return.

Now, I'm sure you'd be the first person to admit that that's a risky proposition to try and find – buying equity in any startup is a very risky proposition. And I think that there are – certainly there are plenty of venture capitalists that fail to do this well. So I think – but to your point, this industry is just getting started.

The ecosystem hasn't been built yet. Like we've got the ecosystem for the stock market which let's face it, 20 years ago, 25 years ago anyway, we – that was basically the large investment banks and the stock brokerage houses and everything was done with – through brokers and it cost hundreds of dollars to do trades a lot of times.

So that – the ecosystem has been built out in the stock market and now there's – it's the people that have – you can now do trades for free or for very, very low cost. And that is still – that infrastructure is still to be built in this industry.

And I think that's where – that's a very interesting opportunity because we know that there are going to be ways for – for example, like just buying loans in an automated fashion is something that is – you can build it yourself because these companies have APIs or you can just go with like Orchard is sort of the market leader here and there.

They're the ones that are doing the picks and shovels for the industry as well insofar as on the investor side. And they're also providing all kinds of benefits on the originator side as well. Now, my sister company, NSR Invest, provides some of those same services as well. And there are others.

Lending Robot provides it for individual investors. It's – you don't have to worry about – you don't have to worry about opening your account at Lending Club. You can go and open your account at Lending Robot. You can also do it at NSR Invest for that matter. And you can have someone else manage the investment for you.

So I think the ecosystem will be built out and there will be some massive opportunities here. But I think if you want to sort of a low volatility investment, which I imagine plenty of your – or some of your listeners probably would fit into that category, then investing in fixed income loans is I think a great way forward.

Hit it out of the park. You can try your hand at equity investing and there will be some massive winners for sure. But it's not easy. What an exciting time we live in. Peter, I hope and it sounds like you're building just an awesome empire in this space. And I loved hearing the story of kind of how you've gotten into this gradually.

I'm curious though. You said that this was the third business you had sold out of two previous businesses. What industries or what was the nature of those businesses you were involved in previously? So they were in label printing, which is about as different as you can get to finances, as manufacturing basically.

And that was a family business. My father started a label business before I was born and I actually – I'm from Australia. As you can probably tell, I don't have an American accent, but I brought that business over 25 years ago from Australia to the US. I was young.

It was an exciting adventure. I thought I'd come over here for two or three years and get it set up and then go back to Australia. But I'm still here and I'm a dual citizen now. I've got an American wife and American kids and we do go back to Australia pretty regularly.

But my life is in this country. So label printing, I ended up being – so I built up that family business and then sold it and started another business in what I thought was a new trend, digital label printing. I was the first all digital label printer in the US and also the first to get on Google AdWords, which is how I built that business.

I really focused purely on doing Google AdWords ads and built that business up and then sold that just before the financial crisis. And that was really – that was the big win for me that allowed me to have lots of choices and take a couple of years off and really have the flexibility to decide what I wanted to do next.

That's awesome. So what does your business look like now? I mean do you have a big team of people? Do you do a solopreneur thing from your computer? So yes, there's three divisions of the business now. There is LendAcademy.com or LendAcademy Media, which really is the website, which I have one full-time employee there and I produce a podcast just like you.

We write articles. We do a little bit of research and that is driven by affiliate revenue is the main driver for that. And then I have the conference business, which is by far the largest business, which has I think like 24 employees I believe. And that's something that's – it started in 2013.

It's growing very fast and that's a profitable business. And then we have the investment management business, NSR Invest, which has – I don't take much of a role on that business anymore. I have a business partner who does – who really drives that and there was five employees there.

That is not a profitable business yet. But those are sort of the three divisions. The conference business and I have obviously no history in the conference business and we've been learning as we go. But it's a really good business. It's something that fits me personally really well. I enjoy public speaking.

I enjoy just networking with people at conferences and it's a real labor of love. In fact, all the businesses – I'm very passionate personally about this space. I really believe in its future and I enjoy coming to work every day. And most of my time that we spent these days on the conference business.

Do you work because you have to or do you work because you want to? I work because I want to. I love what I do. I feel like it's – I took a couple of years off and I really wanted to make my next move into something that I truly enjoyed.

And this is – whereas the label printing business was fun for a while. It's sort of – there's a lot of – it was really my father's business, my father's industry and it wasn't really for me. This is something that I've done for myself and I intend to be in this industry for the rest of my career.

You learned what it was like to have – the reason I'm probing on these is simply because this is what Radical Personal Finance is about. We talk a lot about some of the technical things but frankly, I'm just going to send all my listeners who want in-depth content on marketplace lending.

I'm going to send them to your show because I can't in the context of Radical Personal Finance possibly hope to provide the level of depth that you can provide with a niche podcast like that. But what we focus on is lifestyle design, is building a rich life and what that looks like.

And I've heard that theme all through this show. I've picked up on all those breadcrumbs. And so that's why I'm kind of just asking because it's very instructive and inspirational to my audience. When you took the time off, you had the opportunity to experience I guess what it would be like to not have to work a job, not have to work a business.

Do you think you'll ever – what were those years like for you? So they were – I mean I had a young family. I really – I sold my business in 2008. I worked for another year in that business and then really I still consulted very, very small number of hours per week just to sort of help the transition.

But my time was my own and I just – I enjoyed it. I knew that I wasn't retired. I knew that I wanted to do something else with my life. But knowing that, I felt like here's – I had – when I really quit, I had a three-year-old and a one-year-old.

And so it was great that I was able to hang out with those guys and just be – we took extended vacations. We – I was around like always around where I spent a lot of time with my kids and I – but again, I was looking. I was reading.

I would read – I mean I read blogs. I read – I listened to podcasts. I was still engaged in the business world. I knew I wanted to do – so I wanted to do something online and that was sort of my – so I would spend – even when I wasn't working, I would probably spend five hours a week just kind of going through and just keeping up to date with what was going on and thinking.

And so I had – I mean I had all kinds of crazy ideas about what I was going to do and I actually pursued some of them and this was the one that really – it grabbed my attention. It grabbed my heart and I loved it. And so I say to my wife, I've worked harder in the last 12 months than I've ever worked in my life.

I never worked this hard in the label industry but I'm doing it because I realize that this is – I've got a window of opportunity to really build a real beachhead in this industry, build a thriving company and I want to do that. I love it. I wouldn't say I love every minute of what I do but I love the mission and I love sort of the majority of what I do.

So I choose now to work pretty hard and now we just had a conference last week. I've been taking it easy for the last few days because before a conference, you work 16-hour days nonstop for like two weeks and now once the conference is over, you can breathe and relax a little bit.

My final question. Do you think you'll ever retire? I don't think I'll ever fully retire because this industry is my passion and I feel like I want to stay in this for the long term. I might only work 10 hours a week at some point but I don't ever – I shouldn't say ever.

I'm 50 years old. So I am not quite at retirement age yet but I have some of my friends who are counting down the days already. But I am not one of those people. I intend to work as long as I can, as long as I'm still having fun and I'm certainly having the time of my life right now.

Peter, this has been fantastic. Please take a couple of moments and promote and pitch your different offerings, the different companies, the websites, some of the resources that you have available at each of those websites so my audience can follow. Follow up further in their relationship with you if they'd like.

Sure. So if you want to learn more about P2P lending, marketplace lending, it's LendAcademy.com. So we do articles. We have a podcast. I have a white paper there which I'm actually about to update right now but that's where you can learn. The LendIt Conference, LendIt.com. It's L-E-N-D-I-T and that is where you can find out about the events that we have.

We have not just the actual in-person events. We also do webinars throughout the year and you can join our mailing list and find out about those things. And then finally, NSRinvest.com. If this interests you but you'd rather get some expert advice from somebody to really help you navigate the waters, NSR Invest is a registered investment advisor that basically manages people's accounts.

You can also do a self-managed option as well where you can operate your own accounts and just use the execution tools and the investing tools that are available on that site. So those are my three offerings. Peter, thanks for coming on the show. Okay. Thanks, Josh. It was a pleasure.

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