The Future of Peer To Peer Lending

Peer to peer lending (also known as P2P lending) is the process of borrowing and lending money without the use of an official financial institution as an intermediary. It is a method where investors, who are willing to lend, are matched up with borrowers, either individuals or small businesses, through a peer to peer platform.

How did they come up with the idea of peer-to-peer lending?

The financial crisis back in 2008 has led to the emergence of peer to peer lending.

The crisis caused the banks to start tightening their consumer lending policies. Following the incident, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010, which imposed additional restrictions. As a result, consumers found it hard to get loans, even if they had good credit. This maybe a reference to the US market but it’s also a global view including UK, Europe, New Zealand and even the Far East.

Consequently, P2P lending platforms began to rise and they offered consumers a chance to get loans easily and quickly. To reduce the risk, the emerging platforms only focused on consumers with high credit scores, and the average loan amount ranged from $20,000-$30,000.

While these online lending sites expanded, lending from large banks declined dramatically. But will these platforms continue to flourish in the next couple of years?

There are a number of factors that can determine if the rapid growth in P2P lending will continue:

1. Increase in interest rates – Most experts are certain that as interest rates rise, the number of loan defaults will also increase. They believe this will trigger the continuous rise in the demand of P2P lending. But as long as the economy is doing good and unemployment remains low, the number of defaults should not rise that much.




2. Regulation - Regulators are continuously looking at this matter, specifically since the San Bernardino terrorist obtained a $28,500 loan from Prosper weeks before he killed 14 people on December 2, 2015. Prosper issued the loan after all the proper paperwork and background checks were made. The Government is now looking at supplementary regulations to prevent terrorists from getting loans.




3. Rivalry from banks – Several large banks have decided to work in partnership with other existing lending firms. JP Morgan recently announced a partnership with OnDeck Capital that will allow it to outsource to the OnDeck platform business loans under $250,000. Some of the banks, like BBVA, Credit Suisse and JP Morgan, have directly invested in Prosper’s latest funding round, while Silicon Valley Bank and Norwest Venture Partners have invested in Lending Club.




4. Market size – How big is the lending market? Lending Club’s IPO filing targets the size of the consumer credit market at $3.2 trillion — $380 billion of that would qualify for Lending Club’s policy for loans. Lending firms also may be able to aim for verticals like auto and medical loans. International markets also could be a large chance, but with the exception of Funding Circle.

By 2016, the growth of the peer to peer lending platforms will continue to rise. The rise of interest rates should not slow things down, as long as the economy doesn’t crash and cause unemployment to increase dramatically.

In the near future, how will the large well known Internet consumer companies like Google, Facebook or Amazon enter this space? These Internet giants could have great collaborations with lending sites and be able to offer these loans to a lot more consumers.