P2P Lending Market Outlook 2020

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 $300 000 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 to Paypers, 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, a smart 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.