As the marketplace lending landscape continues to take shape and disrupt traditional financial incumbents, I’m reminded of my days running a trading desk, where I witnessed first hand the disruptive power of increased efficiencies in a marketplace.When I first started trading, stocks were quoted in 1/4’s. That means that if you could buy 1000 shares of stock on the bid and sell on the offer you would make $250 on that transaction (before commissions). Back then, this was an easy thing to do, as systems were slow and you could sometimes pick off a market that was selling stock at, say, 42 1/2 and immediately sell it to someone buying at 42 3/4. This would go on all day, all over the street. On April 9, 2001, Decilimiization became the norm on Wall Street – now, bids and sells were quoted at 42.50 by 42.51. No More huge inefficiencies in spreads. Couple that with many rule changes and upgrades in technology, software, and programming, and you have a market that – at least in theory – is much more “efficient” than in the past. A person at home looking to buy 100 shares on their E*TRADE account now will pay 42.51 for that same market order that would have cost 42 3/4 15 year ago.

Often, not everyone is happy about the effects of increased efficiencies. Scores of traders, trading firms, and analysts who historically derived commission revenue from trading are now looking for new jobs. The shift from commission revenue (via larger spreads) to a battle for Assets Under Management has forced banks to prioritize aggregating assets over building trading revenue. Couple that with the birth of algorithmic trading, and the ability to get in and out of trades by computers using data driven methods, and it all but wiped out the traditional short term or day trader who made a career out of trading by arbitraging these slight inefficiencies in the marketplace.

This same phenomenon has begun to play out in a number of other industries that many had assumed to be hands on/regional in nature. Technological innovations have enabled these industries to consolidate on a national level. Industries that people once thought needed to be managed by an owner operator with extensive domain and market experience can now be managed by national enterprises. Consolidation in Pawn Shops, REO to Rental Pools, and even Dental practices, all of which were traditionally very local in nature, have founds ways to create national consolidated brands that collectively are worth far more and operate more efficiently than the individual parts of which they’re made up. Locally run, independent businesses in these industries now find it difficult to compete with the buying power and lower yield thresholds of these national brands.

We are now witnessing similar changes taking hold in p2p or marketplace lending. Let’s use the traditional bridge lending or private lending space as an example. The model of old school hard money lending has been pretty consistent over a long time. An acquaintance was recently telling me about his competitor, who was 4th generation hard money lender… he said his great great grandfather was doing hard money loans back in the civil war. He was kidding (I think), but the point is that the model hasn’t changed in a very long time: local guy/gal needs money to buy real estate, bank rejects him or takes too long, guy/gal looks for a local lender to provide short term capital until the investment stabilizes or he completes fixing the property and sells it. Typical rates included some points up front and 14-15% interest or more. Fast forward to today. A new breed of market participants are stepping in, and just like with trading, they’re using data, technology, and the ability to make quick, data driven decisions to disrupt the traditional hard money space.

I envision a world in the near future where national hard money lender brands thrive. Given their scale, they’ll have access to cheaper cost of capital, the ability to make quick, data driven decisions, and ability to scale the business strategically. Big name intuitional funds are increasingly interested in buying this paper, and as data on historical returns continues to grow, the yields on such loans will continue to drop, eventually pricing out the “local boots on the ground” that are unable to adapt to both the speed, reputation, and (most importantly) access to cheaper cost of capital. We are already seeing this on some of the larger p2p platforms like Lending Club and Prosper, where net yields to investors have steadily decline over the years, and in turn have allowed for lower borrowing fees for borrowers, thereby increasing the dollar volume of borrowing. Big banks like Wells Fargo, Santander, Union bank and others are now doing hybrid deals with p2p originators. I personally know of a few Hard Money originators scrambling around calling crowd funding sites to see what their business will be like in the next 3-5 years as they start to feel the competition in their backyards. With time, efficiency will be great for borrowers and will be great for originators who adapt to the times and invest in technology and data, but it will be to the detriment of the old guard that benefitted from these inefficiencies for so many years.