Peer-to-peer (P2P) lending has become a flourishing multi-billion dollar industry that brings borrowers and lenders together on a sophisticated technology platform that allows the two parties to satisfy their particular financial needs.
The industry came up against a few challenges last year, with P2P property platform, Lendy, put into administration and lenders stand to lose the money they invested. However, the failure of the P2P lender prompted the regulators to step in and introduce new rules to protect investors. These are designed to ensure investors understand what they are getting into and requiring P2P lenders to be transparent in their communication of the risks and rewards of participating in P2P lending.
It is not unusual for industries that are breaking new ground and disrupting existing industries to experience such setbacks, and often they benefit from the learnings and become far more effective and reliable in the service they offer to customers.
The borrowing and lending opportunities that P2P lenders offer are most likely to remain in high demand because of their lower fees, uncomplicated application processes and quicker approvals for loans. These benefits are likely to continue to underpin growth and foster ongoing innovation in the industry.
What is P2P lending?
P2P lending is facilitated by online lending market platforms, which connect businesses and consumers needing to borrow money and investors looking to earn higher fixed interest-like returns than available in conventional fixed interest instruments. Borrowers can access funds for a wide variety of reasons, from debt consolidation, home improvement, vehicle finance, bridging finance through to business loans. The amounts borrowed range from as little as $500 for individuals through to $300000 for businesses. The P2P platform anonymously matches up buyers and lenders using sophisticated computer algorithms, and some are exploring using blockchain for the security and transparency this technology provides.
The funding platforms act as the intermediary and risk mitigator between the two parties to the financial transactions: borrowers and lenders. Borrowers need to prove their credit credentials to the P2P platform before they are able to access loans. When the P2P lender is satisfied with the creditworthiness of a borrower the funding application is put forward to the lenders on the platform. Lenders extend the funds and receive fixed monthly repayments less the platform’s fee from the borrower’s verified bank account in return.
The P2P lending platforms fund themselves from the origination fees they charge borrowers and the fees deducted from the loan repayments made to investors.
How has the industry developed?
The P2P lending industry has experienced strong growth over the last few years, and this growth rate is unlikely to slow. According toPaypers, the alternative loans industry has grown by 17% a year and is set to hit $312.6bn in size this year. It says P2P lending has been particularly popular in developed markets, but that emerging markets are likely also to become a source of rising demand, given the low access to formal financial services in many countries.
Business P2P lending, which is expected to reach $219.1bn in 2020, comprises 70% of the market, while consumer P2P, at $93.5bn, comprises a much smaller proportion of the industry.
China and the US make up 95% of the P2P lending market, with China the clear leader. However, other developed markets are also experiencing strong growth, including the UK, which is ranked as the third-largest in alternative lending, Switzerland, Denmark and Spain, according to Paypers.
Top P2P Lending Solution Providers In 2020
There are many P2P platforms to choose from globally, with the first launched more than a decade ago. Prosper was launched in 2006, while Lending Club, which has become the largest P2P platform, was set up in 2007. Other leading P2P platforms including Upstart, Funding Circle, LendingTree, Peerform, Mintos, Grupeer, Circleback Lending, Zopa, Social Finance Inc., and Kiva Microfunds.
Supporting the platforms are the P2P software platform providers. These technology companies offer either customised P2P platform solutions that are developed from scratch or white label solutions that come with an already developed user interface to which you can add your company branding.
Below we profile five P2P software platforms across the globe:
Chetu Inc. is a Florida-based software development company that has been in business for 17 years. It develops P2P software that offers a range of services including borrow profiling, online P2P funding applications and loan monitoring processes.
Velmie is based in Europe and provides back end and mobile while-label solutions for alternative payments. Its flexible, microservices approach to building financial software solutions enables it to support P2P lending platforms.
Antier Solutions is represented in the US, UK and India and has 10 years’ experience in offering a white label P2P lending platform that can be launched in the market with the customer’s branding. For the past five years it has incorporated crypto lending into its P2P lending platform and customers can get an automated platform driven by a matching engine or a lending market place.
P2PForce offers customised P2P lending software in Europe, Singapore and India. It’s software is API-based and reasonably priced for start-ups – its core target market. P2PForce claims that it can create an end-to-end peer-to-peer lending platform site within 30-40 days. Its software offers services that include bank statement analysis and loan management.
When choosing a P2P lending software provider it is crucial that you choose one that is trusted and experienced and meets the most robust multi-layered security protocols. Functionalities should also include KYC AML verification, asmart contract-based escrow account, flexible interest rate calculations and a cryptocurrency wallet
What technology drives P2P lending?
Traditional financial services company are hamstrung by the fact that their systems are generally built on legacy technology that is difficult to adjust and evolve and expensive to replace. P2P lenders have an advantage over these conventional finance companies because they have created their technology from scratch in the last decade.
Starting from a clean state has enabled these alternative lenders to utilise the most recent technology and to develop systems in a way that is agile, quicker to take to market and more comfortable to adapt to changing market dynamics without having to revisit a legacy system architecture. They also utilise cloud-based microservices, which enables the system to be scalable and open to continual development and deployment.
An increasing number of P2P lenders are also incorporating Artificial Learning and machine-learning to enhance underwriting systems and detect fraud. Incorporating blockchain and smart contracts also promise to improve the security, transparency and speed of the lending process across the platform.
What are the benefits of P2P lending for borrowers?
Borrowers choose to raise funds they need on P2P platforms because it is convenient, cheaper in many instances, it takes less time to access the credit than at a traditional bank. In general, alternative lending platforms have a 24-hour, or often quicker, turnaround time for loan approval. Platforms also claim their prices are lower on average than borrowers would pay on outstanding credit card overdrafts and unsecured bank loans.
What do investors gain from engaging in P2P lending?
Investors participate in P2P lending because it offers them passive income, while diversifying their investment exposure across a range of borrowers, which potentially lowers the risk of default. The interest rates achieved in a P2P environment are higher than conventional interest rates, particularly in the current low rate environment in the developed world, with Europe official interest rates in negative territory and the US rates at the lowest they have been for years.
Extending the funds to borrowers on a P2P platform offers investors the opportunity to gain exposure to a diversified portfolio of borrowers that have been vetted by the P2P platform. The investor can opt for the risk profile they are most comfortable with, understanding that the higher returns offered by borrowers with lower credit ratings will expose them to higher potential risk. Each investor receives a pro-rata portion of the principal owed, and the monthly interest rate payments on the loan, net of a service charge paid to the platform.
What are some of the challenges?
As it has expanded, the industry hasn’t been without its challenges. In May 2019, a mid-sized P2P lending platform collapsed, leaving investors wondering whether they would get their Stg150m invested. However, these instances have prompted the regulators to put in place measures to better serve and protect the interests of both lenders and borrowers participating in these alternative finance platforms. These include efforts to get platforms to ringfence client funds that haven’t been allocated, a right to a withdrawal period and higher capital requirements to support the platform during times of financial difficulty.
What is the outlook for the industry?
An IndustryARC report expects P2P lending to experience accelerated growth, particularly in real estate lending, because of the low interest rates, simplified online platforms, faster loan approval processes and the greater transparency compared to traditional financial institutions. It expects the US and UK to experience compound annual growth rates of 19% and 23% respectively. It adds that the adoption of blockchain in P2P lending will increase the transparency of the financing process, making it more reliable for both lenders and borrowers. The incorporation of blockchain and smart contracts in P2P lending processes is also likely to enhance the experience for borrower and lender alike and ensure that the industry remains a significant, and growing, proportion of the financial services industry. These innovative technologies make the financing process even more transparent, secure and reliable for borrowers and lenders.
FAQs
Is it worth investing in peer to peer lending? ›
' P2P lending can be an excellent choice if you want to diversify your portfolio. Not only is P2P lending an attractive alternative asset, but it can also still yield impressive returns for investors in a low-interest-rate environment.
What is the future of P2P lending in India? ›The RBI has implemented regulations to ensure that there are no systemic dangers to the ecosystem, and P2P lending is expected to skyrocket in the next five years.
Can you make money with P2P? ›P2P lending can be very profitable to increase your returns by lending money online to others. However, it is similar to all other types of investment in that it is not risk-free.
What is the future of P2P lending? ›Current Market Trend of P2P Investment
The peer-to-peer lending market is to grow at a CAGR (compound annual growth rate) of over 21%, reaching a valuation of $10.5 billion in 2026.
Some investors report average annual returns of more than 10%. Loan types vary from platform to platform. However, the most common kinds are personal, auto, business, mortgages and refinancing, student loan refinancing and medical. Personal loans are the most common type offered by P2P platforms.
Which is the best P2P platform? ›- EstateGuru.
- PeerBerry.
- Robocash.
- Esketit.
- Income Marketplace.
- Reinvest24.
- LANDE.
- Bondster.
The new product, launched on a P2P platform, mandates the minimum number of borrowers to which the investing lender's money need to be diversified is 100. So, if you have Rs 20,000 to invest it will go to at least 100 borrowers. Therefore, the maximum amount of your exposure per borrower will be Rs 200.
Why should I invest in P2P? ›P2P lending benefits investors in a variety of ways. They also have a better rate of return. Operational Costs are reduced because they leverage cutting-edge digital platforms, and the websites usually charge lower fees than traditional financial institutions.
Is P2P lending low risk? ›P2P lending is just as safe as investing in the stock market. However, all investments carry “a level” of risk. The peer-to-peer lending risk is higher when you invest in an unsecure or illegitimate platform.
What are the risks of P2P lending? ›The risk involved with peer-to-peer lending is the risk of default by the borrower, i.e., the borrower doesn't pay the interest and the principal amount. If a borrower defaults, a P2P platform can assist the lenders in recovery and file legal notice against the defaulter. But that is all the platform can do.
Does P2P lending Use Blockchain? ›
The gradual implementation of blockchain technology in P2P lending platforms facilitates safer transparent quick access to funds without having to deal with the complex, slower and more costly loan processes of banks.
How can you lose money in P2P? ›- Yourself (psychological risk).
- Not enough diversification (concentration risk).
- Losing money due to bad debts (credit risk).
- Losing money due to a P2P lending site going bust (platform risk).
- Losing money due to fraud or negligence.
- Selling into a loss (crystallising losses).
Peer-to-peer lending, in which investors make unsecured personal loans to consumers and are often rewarded with average annual returns of 7, 9—or even 11%, might seem like a solution to disappointing returns in other areas. But peer-to-peer lending is a risky investment.
How do I start a P2P business? ›- 1 Choose the form of registration of your project at the government level. ...
- 2 Register your business name. ...
- 3 Decide on a domain. ...
- 4 Gather a team of specialists, including software developers. ...
- 5 Allocate capital for the project or raise money from investors.
P2P lending platforms will push more efficient usage of capital, making more capital available for lending than what traditional banks would have done. Considering the above factors, the P2P lending market has a huge potential, as it is forecasted that by the year 2027, it will grow to USD 558.91 Billion.
Is P2P lending disruptive innovation? ›P2P lending is one of the most revolutionary and disruptive financial innovations of our times. Modern technology, lifestyle, and the way we earn, spend, and invest are the lifeline of P2P lending.
Is P2P lending FinTech? ›As the most prominent sector in Financial Technology (FinTech), peer-to-peer (P2P) lending platforms use digital communication technology to connect lenders and borrowers online. FinTech platforms like P2P lending are easily accessed by smartphones and the internet for getting unconventional loans.
Does Google use P2P? ›To improve audio and video quality, classic Hangouts audio/video calls use a direct peer-to-peer connection when possible. This allows classic Hangouts to connect your call directly to the person you're talking to, rather than routing the call through one of Google's servers.
Why has P2P become so popular? ›P2P lending cuts out the bank or financial institution and allows individual investors to lend money to individuals and businesses. P2P lending has become a popular alternative form of lending thanks to the advantages it provides to both the borrower and the investor.
Is P2P better in crypto? ›P2P Trading Offers Better Earning Opportunities
P2P crypto trading platforms offer better opportunities to earn than traditional exchanges because there are no central authorities that set the prices. As a result, they typically provide better exchange rates and lower fees.
How can you avoid losing money on P2P? ›
- Diversify Your Portfolio. Diversification of lending amount among many borrowers is default risk mitigation. ...
- Do not go extravagant. P2P platforms offer you higher double-digit returns. ...
- Choose the borrower wisely. ...
- Stay invested. ...
- Be Patient.
- Growth investments. ...
- Shares. ...
- Property. ...
- Defensive investments. ...
- Cash. ...
- Fixed interest.
The price of creating a platform for P2P lending fluctuates around $10–200 thousand. It will take the same amount on marketing promotion, if you use bounty campaigns - a little less. The platform can be created from scratch by hiring a blockchain programming team or by outsourcing the development.
How does a P2P lending platform make money? ›For borrowers
However, P2P loans usually charge an arrangement fee. P2P money lending platforms make money by arranging a loan by matching borrowers and lenders. This fee may also be charged in the name of protecting lenders from defaulted loans.
PayPal: PayPal as a platform is one of the first pioneers of P2P payments. It is a secure system that allows purchases with the touch of a button. These payments can be to or from businesses or customers, and the platform can keep track of multiple payment options for your convenience.
Is P2P taxable? ›In a peer-to-peer (P2P) transaction, a buyer paying cash for the transfer of virtual digital assets (VDAs) or crypto assets has to deduct tax at source at the rate of 1% and deposit the amount with the government, the income-tax department clarified on Tuesday.
Is P2P a ripple? ›Ripple's XRP is a peer-to-peer private centralized cryptocurrency based on a distributed consensus ledger. The Ripple platform facilitates money transfers, focusing on low operation fees and lightning-like transaction speed. Ripple is the world's only corporate crypto solution for global payments.
Is ethereum a P2P? ›In Ethereum, nodes use a peer-to-peer (P2P) network to communicate, where nodes send/receive data to/from any other directly connected peer. The used protocol for node discovery in Ethereum is a combination of Kademlia-like protocol4 and RLPx (Recursive Length Prefix eXtension).
Is P2P same as crowdfunding? ›Both crowdfunding and P2P lending give your business money from individuals. The primary difference is that P2P lending gives you a business loan that you have to pay back, while crowdfunding gives you funds that you never have to repay.
Is P2P money laundering? ›Similarly, peer-to-peer loan platforms could allow money launderers to transfer illegal funds to recipients with minimal regulatory scrutiny. Cross-border transfers: Both crowdfunding and peer-to-peer lending services often involve the transfer of funds across international borders.
Why are P2P prices so high? ›
In general, P2P exchange comes with very high spreads because of the limited volume. P2P exchange is for people finding it hard to purchase crypto in the traditional way (bank transfers, credit card). Also, if you have money in an odd ewallet it might be worth it.
Is lending a good business? ›Yes, direct loans to small businesses can be very lucrative. Sometimes lending to professionals who have a stable source of income is just as profitable. Order financing is similar to invoice financing. However, in this case, you will need an order to guarantee the loan.
Which states do not allow peer to peer lending? ›States where there is No Lending Allowed: Arizona, Ohio, New Mexico, North Carolina, North Dakota, Pennsylvania, Texas.
Is Uber a P2P business? ›Peer-to-peer rental sites like Airbnb, product-selling platforms like Etsy, and ride-haling apps like Uber have one thing in common: they are all peer-to-peer marketplaces. Peer-to-peer (P2P) marketplaces – especially peer-to-peer rental – are exploding in popularity.
Does PayPal do P2P? ›PayPal is a payment service that can help users with personal money transfers, online purchases, and e-commerce. You can use PayPal as a peer-to-peer money transfer service, allowing you to send money to others via a linked bank account or a debit or credit card.
Can I start a peer-to-peer lending business? ›In order to start a peer-to-peer lending business, you'll need to launch a website that allows lenders and borrowers to connect with each other. You'll also need to find a bank to service your peer-to-peer loans.
How much should you invest in P2P? ›Retail investor Highly encouraged to limit their investments on any P2P platform to a maximum of RM50, 000 at any period of time. They should be aware and cautious of the risks of investing in investment notes or Islamic investment notes beyond the advised RM50, 000 threshold.
Why should I invest in P2P? ›P2P lending benefits investors in a variety of ways. They also have a better rate of return. Operational Costs are reduced because they leverage cutting-edge digital platforms, and the websites usually charge lower fees than traditional financial institutions.
How much money can you make in peer-to-peer lending? ›Peer-to-peer lending, in which investors make unsecured personal loans to consumers and are often rewarded with average annual returns of 7, 9—or even 11%, might seem like a solution to disappointing returns in other areas. But peer-to-peer lending is a risky investment.
Is Zopa safe to invest in? ›With the Zopa Fixed Term Savings account you can save from 1 to 5 years. These accounts are very safe as your money is protected by the FSCS (Financial Services Compensation Scheme) up to £85,000.
How can you lose money in P2P? ›
- Yourself (psychological risk).
- Not enough diversification (concentration risk).
- Losing money due to bad debts (credit risk).
- Losing money due to a P2P lending site going bust (platform risk).
- Losing money due to fraud or negligence.
- Selling into a loss (crystallising losses).
P2P lending is just as safe as investing in the stock market. However, all investments carry “a level” of risk. The peer-to-peer lending risk is higher when you invest in an unsecure or illegitimate platform.
What is the best peer-to-peer lending site? ›- Best for new borrowers: Upstart.
- Best for fair credit: LendingClub.
- Best for good or excellent credit: Prosper.
- Best for emergencies: SoLo funds.
- Best for small businesses: Funding Circle.
- Best for startups: Kiva.
- Diversify Your Portfolio. Diversification of lending amount among many borrowers is default risk mitigation. ...
- Do not go extravagant. P2P platforms offer you higher double-digit returns. ...
- Choose the borrower wisely. ...
- Stay invested. ...
- Be Patient.
For borrowers
However, P2P loans usually charge an arrangement fee. P2P money lending platforms make money by arranging a loan by matching borrowers and lenders. This fee may also be charged in the name of protecting lenders from defaulted loans.
Taxation On Returns From P2P Lending
In P2P lending, investors essentially earn interest from the amount they lend. Thus, just like interest earned from other instruments like FDs, interest income from P2P lending is taxable. The interest amount earned from P2P lending is classified as 'Income from Other Sources.
Dividend stocks
Dividends are paid per share of stock, so the more shares you own, the higher your payout. Opportunity: Since the income from the stocks isn't related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money.
States where there is No Lending Allowed: Arizona, Ohio, New Mexico, North Carolina, North Dakota, Pennsylvania, Texas.
Why did Zopa stop P2P lending? ›The real reason Zopa has closed its P2P lending operation
It was inevitable that Zopa closed at some point in the near future, because operating a P2P business is in direct competition with running a bank. And the bank has to win that competition or it suffers insurmountable difficulties.
Steve leads Zopa's finance and legal teams. He was pivotal in Zopa achieving its banking licence, working tirelessly to successfully take the company from a P2P loan provider to a fully-fledged UK bank. In 2021 he led Zopa's funding strategy that resulted in Softbank Vision Fund's $300m equity investment.
How safe is Zopa lending? ›
Zopa is a personal loan lender, which means you can borrow from them without having to put up any security to get the loan. It's fully regulated by the Financial Conduct Authority (FCA), but as a digital bank it has no branches or paperwork.