Peer To Peer Lending: The Rise of P2P
In 2008 and 2009, a global financial crisis gave rise to a wave of disruptions in the financial sector. Because of this event, heavy losses forced banks to become stricter about loan disbursements while the chaos and instability within the system caused disappointment for borrowers trying to deal with commercial banks.
Reuters said that fines and compensation amounting up to $235 billion for a litany of misdeeds, ranging from fines for manipulation of currency and interest rate markets to reimbursement to customers who were incorrectly sold mortgages in the United States or insurance products in Britain, have been paid by twenty of the world’s biggest banks for seven years (2008-2015).
The need for innovative lending and borrowing options (due to time consuming, lengthy and rigid procedures of ‘exposed’ banks) gave rise to peer-to-peer lending (P2P) or marketplace lending. It offers easy and fast processes, fast lending decisions and better interest rate agreements for borrowers as well as lenders, and with more transparency!
At present, P2P platforms are among the fastest growing sector in the financial services industry. Lending firms like LendingClub Corporation (LC), Zopa, Prosper Marketplace, Upstart, Funding Circle, CircleBack Lending, Peerform, Pave, Daric, Borrowers First, SoFi, Ratesetter, and Auxmoney are just some of the popular marketplaces in the U.S. and in Europe.
Market Size & Growth Projections
In recent years, the market for alternate finances’ popularity has grown. According to Transparency Market Research, that from $26.16 billion in 2015, the prospect in the global peer-to-peer market will be worth $897.85 billion by the year 2024. The market is expected to rise of up to 48.2% CAGR (Compound Annual Growth Rate) between now and 2024.
What’s more is that the Research and Markets estimated the growth of global P2P lending market to be CAGR of 53.06% during the five-year period between 2016 and 2020. In a report of Morgan Stanley in 2015, it anticipated that such marketplace lending would grasp $150 billion to $490 billion globally by 2020.
In America, although the P2P lending is still in its early stages, it is growing a lot faster than other financial services. China has the largest peer-to-peer lending market and the most active in the world. Compared to having just 50 providers at the end of 2011, today it already has more than 4,000 providers operating in the market. Although there is no verified insight on the numbers in China’s market, regulators disclose a figure of about $93.43 billion in June.
Meanwhile, the alternative finance market in Europe is a mix of crowdfunding and a growth of 92%, has been achieved by P2P lending and other activities in 2015. According to reports given by Cambridge in collaboration with KPMG, the P2P consumer lending became the largest market sector of alternate finance at €366 million volume in 2015 while P2P business lending ranks second in the sector having €212 million.
Challenges & Regulations
Although the growth predictions for peer-to-peer lending are promising, it still has challenges to face on. Managing fraudulent activities and malpractices are a few of the challenges to be dealt with for they might result in loss of investor confidence and trust. Having certain regulations guiding these platforms is only one of its possible solutions.
In Europe, in order to control the activities of these emerging platforms, several countries have introduced changes to alternative finance regulations. Loan-based and investment-based crowdfunding platforms in the UK is being regulated by the Financial Conduct Authority (FCA). In fact, the FCA is actively inspecting lending platforms due to concerns of wrong advertising and miss-selling and unlike regular bank saving accounts, Financial Services Compensation Schemes (FSCS) is not available on such platforms (yet!).
In Australia, an Australian financial services license and a credit license is needed by providers of marketplace lending products and related services. In addition to that, they also need to abide by National Consumer Credit Protection Act (for consumer loans) or Australian Securities and Investments Commission Act 2001 (ASIC Act) for other loans.
Meanwhile, in the U.S., a compliance with Securities and Exchange Commission (SEC) regulations as well as to be in sync with the respective state laws is a must for such platforms.
In April, India’s Reserve Bank of India issued a consultation paper where it suggests to bring P2P lending platforms under the purview by defining them as NBFCs (Non Banking Financial Company).
China has been broad towards internet based lending in the early years, resulting in the increase of such platforms, where quite a number of them give into fraudulent schemes and activities. In July 2015, the Chinese government made the first major step by building a policy framework which initiated as a guidance policy and looked to encourage the development of such platforms amid moderately loose regulatory policies.
In August 2016, predicting that a problem may occur, regulators in China issued an aggressive set of measures to prevent the spread of problematic online lending platforms while making certain that the sector is cleaned up by making such firms exit. According to China Banking Regulatory Commission (CRBC) statistics, 1,778 out of the 4,127 P2P lending platforms (end of June 2016) were suffering from problems such as poor management, capital constraints or were a Ponzi scheme.
Final Word
Despite the continued risk of default, fraudulent practices or borrower’s turning to banks, the growth prospects of peer-to-peer lending (P2P) platforms remain strong, especially in times when the banking sector continues to struggle with prolonged damages. Therefore, great opportunities await for loan providers as well as for borrowers (both in retail and small businesses) in a well-regulated and transparent peer-to-peer platform as an alternative investment.