Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online, and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions. As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower.
Also known as crowdlending, many peer-to-peer loans are unsecured personal loans, though some of the largest amounts are lent to businesses. Secured loans are sometimes offered by using luxury assets such as jewelry, watches, vintage cars, fine art, buildings, aircraft, and other business assets as collateral. They are made to an individual, company or charity. Other forms of peer-to-peer lending include student loans, farming loas,commercial and real estate loans, payday loans, as well as secured business loans, leasing, and factoring.
The interest rates can be set by lenders who compete for the lowest rate on the reverse auction model or fixed by the intermediary company on the basis of an analysis of the borrower’s credit. The lender’s investment in the loan is not normally protected by any government guarantee. On some services, lenders mitigate the risk of bad debt by choosing which borrowers to lend to, and mitigate total risk by diversifying their investments among different borrowers.
The lending intermediaries are for-profit businesses; they generate revenue by collecting a one-time fee on funded loans from borrowers and by assessing a loan servicing fee to investors or borrowers (either a fixed amount annually or a percentage of the loan amount).
Peer-to-peer lending does not fit cleanly into any of the three traditional types of financial institutions—deposit takers, investors, insurers and is sometimes categorized as an alternative financial service.
Typical characteristics of peer-to-peer lending are:
• it is sometimes conducted for profit;
• no necessary common bond or prior relationship between lenders and borrowers;
• intermediation by a peer-to-peer lending company;
• transactions take place online;
• lenders may often choose which borrowers to invest in, if the P2P platform offers that facility;
• the loans can be unsecured or secured and are not normally protected by government insurance;
loans are securities that can be transferred to others, either for debt collection or profit, though not all P2P platforms provide transfer facilities or free pricing choices and costs can be very high, tens of percent of the amount sold, or nil.
Early peer-to-peer lending was also characterized by disintermediation and reliance on social networks but these features have started to disappear. While it is still true that the emergence of internet and e-commerce makes it possible to do away with traditional financial intermediaries and that people may be less likely to default to the members of their own social communities, the emergence of new intermediaries has proven to be time and cost saving. Extending crowdsourcing to unfamiliar lenders and borrowers opens up new opportunities.
Most peer-to-peer intermediaries provide the following services:
• online investment platform to enable borrowers to attract lenders and investors to identify and purchase loans that meet their investment criteria
• development of credit models for loan approvals and pricing
• verifying borrower identity, bank account, employment and income
• performing borrower credit checks and filtering out the unqualified borrowers
• processing payments from borrowers and forwarding those payments to the lenders who invested in the loan
• servicing loans, providing customer service to borrowers and attempting to collect payments from borrowers who are delinquent or in default
• legal compliance and reporting
• finding new lenders and borrowers (marketing)
Zopa, founded in February 2005, was the first peer-to-peer lending company in the United Kingdom. Funding Circle, launched in August 2010, became the first significant peer-to-business lender and offering small businesses loans from investors via the platform. Funding Circle has originated over £6.3 billion in loans.
In 2012, the UK government invested £20 million into British businesses via peer to peer lenders. A second investment of £40 million was announced in 2014.The intention was to bypass the high street banks, which were reluctant to lend to smaller companies. This action was criticized for creating unfair competition in the UK, by concentrating financial support in the largest platforms.
In 2015, UK peer-to-peer lenders collectively lent over £3bn to consumers and businesses.
According to the Cambridge Centre for Alternative Finance (Entrenching Innovation Report), £3.55B was attributed to Peer to Peer alternative finance models, the largest growth area being property showing a rise of 88% from 2015 to 2016.
The peer-to-peer lending industry in the US started in February 2006 with the launch of Prosper Marketplace, followed by Lending Club. Both Prosper and Lending Club are headquartered in San Francisco, California.
More people turned to peer-to-peer companies for borrowing following the financial crisis of 2007–2008 because banks refused to increase their loan portfolios.
Lending Club is the largest peer-to-peer lender in US based upon issued loan volume and revenue, followed by Prosper. Lending Club is also the largest peer-to-peer lending platform worldwide. Executives from traditional financial institutions are joining the peer-to-peer companies as board members, lenders and investors, indicating that the new financing model is establishing itself in the mainstream.
Many micro loan companies have emerged to serve the 40 million SMEs, many of which receive inadequate financing from state-owned banks, creating an entire industry that runs alongside big banks.
As the Internet and e-commerce grew in the 2000s, many P2P lenders were founded with various target customers and business models.
The first P2PL in Hong Kong was WeLab, which has backing from American venture capital firm Sequoia Capital and Li Ka-Shing’s TOM Group.
In China, in 2016 there were more than 4,000 P2P lending platforms.As of August 2016, cash flow on all P2P lending platform have already exceeded 191 billion Chinese Yuan (US$29 billion) in the month. Lender’s return rate across all P2P lending platform in China is about 10% per annum on average, with a few of them offering more than 24% return rate.A colloquial term for P2P lending in Chinese translates as “grey market”, but is not to be confused with grey markets for goods or an underground economy.
In 2012 Australia’s first peer to peer lending platform, SocietyOne, was launched. As of June 2016 the Australian Government has been encouraging the development of financial technology and peer to peer lending startups through its ‘regulatory sandbox’ program.
Several peer-to-peer lending services initiated operation and loan origination during 2014, Following the economic uprising of 2011,and public opinion regarding these platforms is positive. The maximum interest rate in Israeli P2P Arenas is limited by the “Extra-Banking Lending Regulations”.
Peer-to-Peer P2P Lending for both real estate-secured and non-real estate-secured transactions by either investors or borrowers, is a mature industry in Canada. Peer-to-Peer P2P lending in real estate-secured transactions is regulated by members of the Mortgage Broker Regulators’ Council of Canada (MBRCC)
Since April 2018, Brazilian p2p lending companies may operate directly without the intermediation of a bank or other financial institution.
By means of the Resolution 4656/2018, the Central Bank of Brazil created a new type of institution called SEP (personal lending society) that aims to provide a platform for direct negotiation of loans between individuals and companies. A SEP cannot lend using its own resources but only operate as an intermediary. The borrower must be Brazilian individual or company, but there isn’t a restriction regarding lenders nationality.
In Germany, P2P lending is growing fast in recent years and the transaction volume will reach an estimated value of €252 million in 2021.
Advantages and criticism
One of the main advantages of person-to-person lending for borrowers can sometimes be better rates than traditional bank rates can offer. The advantages for lenders can be higher returns than obtainable from a savings account or other investments, but subject to risk of loss, unlike a savings account. Interest rates and the methodology for calculating those rates varies among peer-to-peer lending platforms.
For investors interested in socially conscious investing, peer-to-peer lending offers the possibility of supporting the attempts of individuals to break free from high-rate debt, assist persons engaged in occupations or activities that are deemed moral and positive to the community, and avoid investment in persons employed in industries deemed immoral or detrimental to community.