Peer-to-Peer Lending: Turning the Tables on Traditional Banks
Benjamin Franklin said, “Out of adversity comes opportunity.” We may not know what prompted Franklin to make this observation, but, if he were alive today, he might very well be speaking of peer-to-peer (P2P) lending.
Peer-to-peer lending now extends beyond online companies facilitating loans between peers of individuals using online platforms. Today’s P2P marketplace includes not only individuals as lenders and borrowers, but businesses, as well. In certain countries, the very nature of the lender-borrower relationship has also changed. In 2008, the U.S. Securities and Exchange Commission forced Prosper and Lending Club to register their offerings as securities. Lenders became investors under the law and loans became investments. Other countries added similar restrictions.
The growth of the P2P marketplace one can only describe as explosive, especially among countries with robust financial markets. In the U.S., alone, P2P investors funded $6.6 billion in 2014 — a 128% increase from December of 2013. Despite the U.S. P2P lending market dominating other countries in volume, the U.K. boasts a 72% larger P2P market, based on loan volume per capita.
The European P2P marketplace experienced a 144% increase, reaching nearly €3 billion ($3.9 billion) in 2014, excluding the U.K. French small business P2P loans grew nearly 4,000% the same year, with investors funding €8.2 million ($10.6 million) in small-business loans. Chinese investors anteed up 103.6 billion yuan ($16.72 billion) in 2014.
Considering the success of the P2P marketplace in these and other countries, one has to wonder – will investors see P2P lending as a sound way to diversify across international borders?
Why So Popular
The success of P2P investing may lend credence to an old adage: If you build a better mousetrap, the world will beat a path to your door. Clearly, investors and borrowers are beating a path to each other in the P2P marketplace. We can only conclude that it is because P2P offers both something better than they can find elsewhere.
For the lender/investor, P2P offers returns above what banks offer in terms of interest rates. Moreover, since P2P investing is generally highly diversified, investors experience less risk than with traditional investments. Higher yields and lower risk? That’s one fine mousetrap.
P2P offers borrowers unsecured loans at unprecedentedly low rates, and secured loans at better rates than those offered by traditional lending institutions. Many borrowers can secure P2P loans with rates up to 5% lower than offered by their credit card. As if that were not reason enough for borrowers to abandon banks in favor of P2P companies, most P2P loans are offered at a fixed rate. The ability to apply for a loan without having to complete reams of paperwork or endure a lengthy approval process probably doesn’t hurt, either.
But wait — there’s more!
Unlike most conventional loans, most P2P loans have low late-payment fees, and do not penalize responsible borrowers with pre-payment penalties.
How P2P is Challenging Retail Banks
If the banking industry could fall asleep and have a nightmare, it would be about peer-to-peer funding. There is little room for doubt that the threat P2P poses to banking, as a whole, will eclipse that posed by online banking rivals. In fact, the writing may already be on the bank wall. In addition to the advantages to P2P lending that we have discussed, the P2P marketplace enjoys a couple of competitive advantages over traditional banks.
Easier Application Process
According to the U.S. Federal Reserve, small business spend an average of 25 hours on loan application paperwork. Further, it can take a month or more for even a small loan to be approved. The P2P loan application process, by contrast, is quick and easy and funds can be available in days, not weeks.
P2P More Efficient
Three factors contribute to P2P lending companies’ ability to operate more efficiently than traditional lending institutions. First, since—at least until the present—the majority of P2P lending companies have been online exclusively, they can operate with one or two physical locations, rather than thousands. And fewer physical facilities mean fewer employees are needed to staff them. Finally, fewer building require less infrastructure, such as computers and IT networks, to support them. These differences make the playing field hardly fair.
For example, Wells Fargo has 270,000 employees to Prosper’s 240. Wells Fargo has 9,000 locations to maintain and support, Prosper has 2. Of course, Prosper and other P2P companies do not offer the full range of services that banks offer, but the P2P marketplace stands poised to take a significant slice of the personal and business loan pie from the banking industry.
Latest Niche Trends
As with all new industries that experience rapid growth, P2P is evolving. So dynamic are the changes that it’s becoming more and more difficult to define P2P. Peers used to be individuals, now they can be institutions. P2P used to be exclusively an online service, now some companies are going off line and establishing relationships with brick and mortar institutions in order to connect lenders and borrowers. P2P companies used to merely connect lenders with borrowers, now many also service the complete loan, beginning to end. Other changes promise to redefine the P2P industry even further.
Institutions Getting involved
The relative stability and high yields of P2P loans has not escaped the attention of traditional investment fund managers. And why should it? As managers find ways to include P2P companies in their portfolios, it will provide avenues for, perhaps, even non-investors to grab a piece of the P2P pie through their 401K or investment accounts.
If You Can’t Beat’em Join’em
One emerging trend is surprising, thought it might not aught to be. Since P2P lending poses a very real threat to the domination banking has enjoyed in the loan industry, one might think that the last thing a bank would do is support the P2P industry. But one is doing just that. Sort of.
Goldman Sachs has announced that it will enter the P2P market, making it the first bank to do so. Goldman Sachs plans to offer both unsecured personal loans and loans fore small business.
A report from Goldman Sachs estimates that marketplace lending will take nearly $11 billion (7% of total profits) from its profits over the next five years. Perhaps, P2P lending’s most significant impact will be not how it changes the process of lending, but how it changes the banking industry.
Leading P2P Service Providers
The success of the P2P marketplace has resulted in new companies starting up to ride the wave. We’ll briefly examine a few of the top ones.
Prosper. Considered the first online P2P service, Prosper, also known as Prosper Marketplace, boast $5 Billion Borrowed, with 250,000 people “empowered.” Prosper offers rates as low as 5.99% APR.
Lending Club. The world’s largest P2P provider, Lending Club has facilitated more than $13 billion in loans.
Funding Circle. Started in the U.K. and having expanded to the U.S., Funding Circle focuses on small business loans and has facilitated $1.5 billion in loans globally.
Kiva. A non-profit P2P facilitator, Kiva focuses on humanitarian efforts by funneling loans to impoverished persons around the world. Lenders can pitch in as little as $25. Kiva cmaims 1.3 million lenders and $811 million in loans.
Zopa – the U.K.’s first and largest P2P company. They have facilitated $56.6 million in loans.
Forecasts for 2016-2020
Depending on who you ask, peer-to-peer loan volume is expected to reach $290 to $490 billion by 2020, at an average growth rate of 51% per year. Few industries enjoy a growth rate even close to that.
DIY P2P Marketplace Building Tools
P2P networks are not limited to sharing money. Any commodity or service can be shared, contributed to, or loaned. Rebuilding Society/White Label Crowd, Zidisha’s Open Source Platform, and MyAzimia are examples of various online tools intended to help the individual or small organization develop an online P2P presence. Even though most services provide excellent documentation and assistance, you must consider whether you have the time to devote to developing a P2P platform, or if you would prefer to hire a professional developer.
How Ignite can help
Ignite Outsourcing is a global provider of leading-edge technology, including mobile app development, secure tokenized payment processing, and P2P solutions. Whether you need your P2P platform redesigned to meet the new challenges of the global P2P market, or a smaller solution tailored to the needs of a small upstart P2P company, we can develop exactly what you need — nothing more, nothing less.
Contact us, today, and let our development team show you how we can help you connect lenders and borrowers from around the globe, or just in your town.