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Peer-to-peer lending is a decentralized form of lending. There are two major business models on which P2P platforms work:
1. People (lenders, investors) give out loans to other people (borrowers)
2. Companies (originators) grant loans to their users (borrowers) in which other users (investors) can invest,
The first way of lending is also known as social lending. Although it has been a popular way of funding since the sixteenth century (people who have money to give money to people who need money), its real boom begins with the development of technology and the opportunities they provide at the beginning of the 21st century. One of the significant advantages of this model is its accessibility – virtually everyone can borrow from anyone who is willing to allocate funds.
The first platform that develops P2P lending and is the pioneer in the field is Zopa. It is a British platform and operates only for citizens of the UK by directly linking lenders with borrowers. At present, more than 2 billion pounds of loans have been made available through Zopa that have generated returns for their lenders and helped borrowers to realize their personal goals and desires.
A year later, in 2006, two of the most prominent P2P lending platforms – Lending Club and Prosper – appeared in the US. Gradually, the number of platforms is growing, both in the US and in Europe and China. Today there are hundreds of platforms that lend millions worth of loans.
In spite of the current boom, in the beginning, P2P lending is seen as something niche and specific, a service created for a small number of people reluctant to trust something that is entirely online and no one has ever heard of before.
With Leman Brothers bankruptcy in 2008, however, things are rapidly changing. Confidence in financial institutions falls sharply, investments are both uncertain and unattractive, and obtaining credit is far more difficult. Peer-to-peer lending naturally rises as an alternative to the current financial status quo.
Since 2008, peer-to-peer lending platforms have been developing at an extraordinary pace. The convenience and speed they offer are highly appreciated by borrowers as well as by investors. The lack of an intermediary allows this type of platforms to work efficiently with meager fees and the saved money return in the form of profits for investors and excellent conditions for borrowers.
The business model where platforms rely on loan originators is also hugely successful. When loans are lent by experienced and sound financial institutions, it gives investors a sense of calm that borrowers have gone through the processes and pre-approval checks that each lending company uses and develops.
On the other hand, this model allows loan originators who offer their credit on platforms to further develop their business using the resources they receive. These are relationships where everyone wins, and so more and more lenders are joining P2P lending platforms.
Different originators offer different types of loans, allowing investors to diversify their portfolio, as well as providing a wide choice of risk and return. Many of the originators also offer a buyback guarantee – buying back bad credit in which it is invested, and so the satisfaction of investors remains guaranteed.
It is important to note that in this industry, as in any other, there are some shocks. The TrustBuddy P2P platform announced bankruptcy in 2015, and the Lending Club had to cope with an extremely severe crisis when it turned out they had allowed themselves to manipulate the borrowers’ credit rating system in order to allocate more credits.
Despite these and a few cases of fraud in China, P2P lending marks phenomenal growth, and there are no plans to stop short. The increasing number of platforms gives more opportunities and, from an investors point of view, is an entirely positive trend. The popularity that they have made them transformed them from something unknown and niche into the most adequate and affordable solution for generating high returns over the last decade.
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