Dec 12, 2014 · 5 minutes

Peer-to-peer businesses are seeing something of a rebirth. After early Internet startups like eBay and Napster built their business models on peer-to-peer technology, the social media sites that drove the second wave of the web stole their thunder.

But in recent years P2P has returned in a way that promises to remake commerce: Bitcoin. Crowdfunding. The sharing economy. Even Bittorrent, one of the first broadly popular if not financially lucrative P2P companies, is looking for a comeback by creating a P2P browser that aims to remake the web itself.

The area of P2P lending has been an especially fertile market. Fitch Ratings reckons that $2.4 billion in P2P loans were originated last year and that the industry could grow to $114 billion over time. LendingClub's successful IPO is proving to be a milestone in the mainstreaming of P2P lending by raising consumer awareness of the market, showing Wall Street is warming up to its potential, and paving the way for other startups to list their shares.

LendingClub's IPO raised $870 million for the eight-year-old company. Initially priced between $10 and $12 a share, the stock officially priced Wednesday at $15 a share, rose 56 percent its first day and is trading another 5% higher today at $24.70. That leaves the company with a market cap of $8.9 billion, more valuable than all but a dozen banks. Last April, when LendingClub saw its last round of financing, the company was valued at $3.5 billion.

Like other startups that have gone public this year, LendingClub is seeing rapid revenue growth coupled with even faster-growing operating expenses. Revenue grew 188 percent in 2013, and over the first nine months of this year it's grown a further 123 percent to $144 million. But after posting a net profit of $7.3 million in in 2013, the company swung to a loss of $23.9 million last year.

LendingClub is losing money this year even though the company's spending as a percentage of revenue remains steady in most categories: marketing, engineering and loan servicing. Instead, the increase in operating spending came from a category LendingClub calls “other” administrative costs, which includes accounting, business development and legal salaries.

These “other” administrative costs rose 320 percent to $56 million (equal to 39 percent of revenue) in the first nine months of 2014 from $13 million (21 percent of revenue) in the year-ago period. LendingClub didn't explain clearly why, but mentioned that its April purchase of Springstone, a P2P lender focusing on education and medical costs, accounted for part of the increased costs.

Legal costs may become a larger portion of P2P lending budgets now that the industry is moving from a nascent entrepreneurial idea to a market drawing in more consumers and small lenders. The P2P loan market took root in 2005 when companies like Kiva, a microfinance company focused on emerging economies, and Zopa, a UK company, were founded. LendingClub, along with its chief rival Prosper, were founded the following year.

For several years, banks didn't take the new lenders seriously. Some early platforms were lax about screening out risky loans. In 2008, the credit crunch and scrutiny by the SEC forced some to raise funds quickly or shut down temporarily. But it was in the wake of the financial crises that P2P lenders began to gather steam as big banks, squeezed by stricter lending guidelines and increased capital requirements, left many creditworthy borrowers falling through the cracks.

LendingClub found many of those reliable borrowers by exploiting another weakness of banks – using rich data to identify the best candidates. The company says it uses a proprietary credit-scoring system to screen loan candidates, approving fewer than 10 percent of all loan requests. Lenders are further shielded from bad loans with tools that let them customize or diversify loan portfolios.

Such innovations put LendingClub at the head of the P2P lending pack. But there are dozens of other startups operating in different lending markets – consumer, real estate, education, small business – which means consolidation is likely as bigger companies like LendingClub begin to diversify into new markets.

LendingClub is expanding into new areas like small-business lending, and its $140 million purchase of Springstone was aimed at moving into education and medical loans. The Springstone deal exemplifies both the opportunities and the risks that LendingClub faces as it grows: It not only represents new markets, but newer threats of regulation.

In the 26-page risk factor section of LendingClub's prospectus, the company warns about increased state and federal scrutiny of medical financing procedures not covered by health insurance. Last December, the Consumer Financial Protection Bureau fined a GE Capital subsidiary $34 million for deceptive marketing practices.

In June, Springstone received a civil investigative demand from the CFPB for documents related to its medical financing services. LendingClub warned that the investigation could yield fines and penalties that could drive up operating costs. As P2P lenders grow in size and stature, they are likely to face even more scrutiny and regulation, a concern outlined by Fitch when it considered the LendingClub IPO in September.

Fitch, along with Standard & Poor's, also worried that the new industry hasn't been tested by hard times. “P2P loans have yet to experience a full business and economic cycle, which makes it difficult to assess underwriting quality and borrower behavior and, in turn, forecast potential loan losses in a downturn,” an S&P report issued in April noted.

It's also not clear yet how borrowers or the individuals lending to them will respond to higher interest rates. The algorithms running LendingClub's credit scoring may not anticipate how many defaults arise from higher rates, or how lenders will react when they see they've committed capital at below-market rates. That's a concern for LendingClub, which warned in its S-1 that “a relatively small number of investors account for a large dollar amount of investment in loans.”

LendingClub's performance in the stock market will determine how many of the up-and-coming P2P startups will be welcomed as they ready their own IPOs (OnDeck, a small-business lending site, is hoping to raise $170 million next week) or how they are valued in future rounds of private financing.

But a lot is riding on a company that is yet to be battle tested by hard times, faces the prospect of increased regulation, is losing money so far in 2014 and yet is valued at close to $9 billion. If LendingClub stumbles, its peers may stumble as well.