Peer-to-peer lending
Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online, and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions. As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower. There is the risk of the borrower defaulting on the loans taken out from peer-lending websites.
Peer-to-peer fundraising encourages supporters of a charity or non-profit organisation to individually raise money. It's a subcategory of crowdfunding. Instead of having one main crowdfunding page where everybody donates, people can have multiple individual fundraising pages with peer-to-peer fundraising, which the individual people will share with their own networks.
Also known as crowdlending, many peer-to-peer loans are unsecured personal loans, though some of the largest amounts are lent to businesses. Secured loans are sometimes offered by using luxury assets such as jewelry, watches, vintage cars, fine art, buildings, aircraft, and other business assets as collateral. They are made to an individual, company or charity. Other forms of peer-to-peer lending include student loans, commercial and real estate loans, payday loans, as well as secured business loans, leasing, and factoring.
The interest rates can be set by lenders who compete for the lowest rate on the reverse auction model or fixed by the intermediary company on the basis of an analysis of the borrower's credit. The lender's investment in the loan is not normally protected by any government guarantee. On some services, lenders mitigate the risk of bad debt by choosing which borrowers to lend to, and mitigate total risk by diversifying their investments among different borrowers.
The lending intermediaries are for-profit businesses; they generate revenue by collecting a one-time fee on funded loans from borrowers and by assessing a loan servicing fee to investors or borrowers. Compared to stock markets, peer-to-peer lending tends to have both less volatility and less liquidity.
Characteristics
Peer-to-peer lending does not fit cleanly into any of the three traditional types of financial institutionsdeposit takers, investors, insurersand is sometimes categorized as an alternative financial service.Typical characteristics of peer-to-peer lending are:
- it is sometimes conducted for profit;
- no necessary common bond or prior relationship between lenders and borrowers;
- intermediation by a peer-to-peer lending company;
- transactions take place online;
- lenders may often choose which borrowers to invest in, if the P2P platform offers that facility;
- the loans can be unsecured or secured and are not normally protected by government insurance;
- loans are securities that can be transferred to others, either for debt collection or profit, though not all P2P platforms provide transfer facilities or free pricing choices and costs can be very high, tens of percent of the amount sold, or nil.
- marketed via social media and social networks.
Most peer-to-peer intermediaries provide the following services:
- online investment platform to enable borrowers to attract lenders and investors to identify and purchase loans that meet their investment criteria
- development of credit models for loan approvals and pricing
- verifying borrower identity, bank account, employment and income
- performing borrower credit checks and filtering out the unqualified borrowers
- processing payments from borrowers and forwarding those payments to the lenders who invested in the loan
- servicing loans, providing customer service to borrowers and attempting to collect payments from borrowers who are delinquent or in default
- legal compliance and reporting
- finding new lenders and borrowers
History
United Kingdom
, founded in February 2005, was the first peer-to-peer lending company in the United Kingdom. Funding Circle, launched in August 2010, became the first significant peer-to-business lender and offering small businesses loans from investors via the platform. Funding Circle has originated over £6.3 billion in loans.In 2011, Quakle, a UK peer-to-peer lender founded in 2010, closed down with a near 100% default rate after attempting to measure a borrower's creditworthiness according to a group score, similar to the feedback scores on eBay; the model failed to encourage repayment.
In 2012, the UK government invested £20 million into British businesses via peer to peer lenders. A second investment of £40 million was announced in 2014. The intention was to bypass the high street banks, which were reluctant to lend to smaller companies. This action was criticised for creating unfair competition in the UK, by concentrating financial support in the largest platforms.
Investments have qualified for tax advantages through the Innovative Finance Individual Savings Account since April 2016. In 2016, £80bn was invested in ISAs, creating a significant opportunity for P2P platforms. By January 2017, 17 P2P providers were approved to offer the product.
At one stage there were over 100 individual platforms applying for FCA authorisation, although many withdrew their applications as of 2015.
Since April 2014, the peer-to-peer lending industry has been regulated by the Financial Conduct Authority to increase accountability with standard reporting and facilitate the growth of the sector. Peer-to-peer investments do not qualify for protection from the Financial Services Compensation Scheme, which provides security up to £85,000 per bank, for each saver, but regulations mandate the companies to implement arrangements to ensure the servicing of the loans even if the platform goes bust.
In 2015, UK peer-to-peer lenders collectively lent over £3bn to consumers and businesses.
According to the Cambridge Centre for Alternative Finance, £3.55B was attributed to peer to peer alternative finance models, the largest growth area being property showing a rise of 88% from 2015 to 2016.
United States
The peer-to-peer lending industry in the US started in February 2006 with the launch of Prosper Marketplace, followed by LendingClub. Both Prosper and LendingClub are headquartered in San Francisco, California. Early peer-to-peer platforms had few restrictions on borrower eligibility, which resulted in adverse selection problems and high borrower default rates. In addition, some investors viewed the lack of liquidity for these loans, most of which have a minimum three-year term, as undesirable.In 2008, the U.S. Securities and Exchange Commission required that peer-to-peer companies register their offerings as securities, pursuant to the Securities Act of 1933. The registration process was an arduous one; Prosper and LendingClub had to temporarily suspend offering new loans, while others, such as the U.K.-based Zopa Ltd., exited the U.S. market entirely. Both LendingClub and Prosper gained approval from the SEC to offer investors notes backed by payments received on the loans. Prosper amended its filing to allow banks to sell previously funded loans on the Prosper platform. Both LendingClub and Prosper formed partnerships with FOLIOfn to create a secondary market for their notes, providing liquidity to investors. LendingClub had a voluntary registration at this time, whereas Prosper had mandatory registration for all members.
This addressed the liquidity problem and, in contrast to traditional securitization markets, resulted in making the loan requests of peer-to-peer companies more transparent for the lenders and secondary buyers who can access the detailed information concerning each individual loan before deciding which loans to fund. The peer-to-peer companies are also required to detail their offerings in a regularly updated prospectus. The SEC makes the reports available to the public via EDGAR.
More people turned to peer-to-peer companies for borrowing following the 2008 financial crisis because banks refused to increase their loan portfolios. The peer-to-peer market also faced increased investor scrutiny because borrowers' defaults became more frequent and investors were unwilling to take on unnecessary risk.
In 2013, LendingClub was the largest peer-to-peer lender in US based upon issued loan volume and revenue, followed by Prosper. LendingClub was also the largest peer-to-peer lending platform worldwide. The interest rates ranged from 5.6 to 35.8%, depending on the loan term and borrower rating. The default rates varied from about 1.5% to 10% for the more risky borrowers. Executives from traditional financial institutions are joining the peer-to-peer companies as board members, lenders and investors, indicating that the new financing model is establishing itself in the mainstream. LendingClub abandoned the peer-to-peer lending model in the fall of 2020.
China
Many micro loan companies have emerged to serve the 40 million SMEs, many of which receive inadequate financing from state-owned banks, creating an entire industry that runs alongside big banks.As the Internet and e-commerce grew in the 2000s, many P2P lenders were founded with various target customers and business models.
The first P2PL in Hong Kong was WeLab, which has backing from American venture capital firm Sequoia Capital and Li Ka-Shing's TOM Group.
Ezubao, a website launched by Yucheng Group in July 2014 purporting to offer P2P services, was shut down in February 2016 by authorities who described it as a Ponzi scheme. Ezubao took in 50 billion renminbi from 900,000 investors.
In China, in 2016 there were more than 4,000 P2P lending platforms, but 2,000 of them had already suspended operations. As of August 2016, cash flow on all P2P lending platform have already exceeded 191 billion Chinese Yuan in the month. Lender's return rate across all P2P lending platform in China is about 10% per annum on average, with a few of them offering more than 24% return rate. A colloquial term for P2P lending in Chinese translates as "grey market", but is not to be confused with grey markets for goods or an underground economy.
In June and July 2018, scores of Chinese online P2P lending platforms fell into financial or legal troubles because of tightened regulation and liquidity. According to WDZJ.com, a P2P industry information provider, 23 P2P platforms were reported to be in financial distress or under investigation in the first 10 days of July. That follows 63 such cases in June, a higher number than in any month in the previous year.
In late June, Shanghai police detained four senior executives of Tangxiaoseng, an online lending platform controlled by Zibang Financial Service Internet Technology Co. Ltd. and told investors on June 28, 2018, that Zibang Financial was suspected of "illegally raising funds from the public." On July 20, 2018, iqianbang.com, a Beijing-based P2P lending platform announced to close down, citing "deteriorating online lending environment and drying up liquidity."
People's Bank of China announced in early July 2018 said that regulators will extend a two-year-old nationwide campaign to clean up fraud and violations in the online financial market, targeting P2P and other online lending and financial activities. More than 5,000 operations have been shut down since the campaign began in 2016.
In April 2019, one of China's top peer-to-peer lending platforms, tuandai.com, collapsed, resulting in financial losses for scores of Chinese investors.
Analysts noted that Chinese P2P lending quickly mutated from its original "disintermediated bridge" model into "third-party wealth management hubs" that bypassed regulatory capital constraints. This evolution was characterized as a digital migration of traditional private lending rather than a technological revolution, often serving as a facade for underground money houses.