Peer-to-Peer (p2p) lending is the method of loaning money to individuals or businesses through online services that match lenders with borrowers. It involves debt financing that enables individuals to borrow and lend money — without the use of an intermediary. Peer-to-Peer lending removes the middleman from the process, but it also involves more time, effort, and risk than the general brick-and-mortar lending scenarios. Economical, technological, and consumer/investor changes have given rise to the legitimacy of P2P networks and marketplaces over the last few years. Starting with the 2008 global financial crisis, and subsequent regional financial crises, global banks retracted credit, particularly to SMEs and borderline creditworthy consumers.

The volume of global P2P payments and remittances is eclipsing $1 trillion yearly, with per annum growth rates in P2P lending volumes reaching 50% — 80% in various markets during the past few years. The appearance of digital technologies, blockchain, and cryptocurrencies such as Bitcoin, has also facilitated consumer and investor adoption of online marketplaces.

Today, P2P platforms are among the fastest growing segments in the financial services space. Peer-to-Peer volumes have become so large and have grown at such a fast rate that large financial institutions are taking notice and considering entering the P2P lending market, either through investing in or collaborating with these marketplaces. Recently, a report by Cambridge University in collaboration with KPMG placed P2P consumer lending at about $367 million in 2015 (making it the largest market segment of alternative finance), and placed P2P business lending at about $213 million (ranking second in the same segment).

Some of the well-known marketplaces in the U.S. and Europe are LendingClub Corporation (LC), Zopa, Prosper Marketplace, Upstart, Funding Circle, CircleBack Lending, Peerform, Pave, Daric, Borrowers First, SoFi, Ratesetter, and Auxmoney. Indonesian online Peer-to-Peer lending marketplace Investree secures a series of funding commitment from a local venture capital firm, Kejora. Before securing the funding commitment, Investree had been bootstrapping for almost a year, raising $500,000 for its initial stage development. As of mid-2016, Investree has disbursed 23 loans totaling Rp 6.8 billion. Average funding period is five days, with a 16.7% average return to lenders.

Market Size & Growth Projections

The market for alternative finance has gained popularity in recent years. Transparency Market Research suggests that the opportunity in the global p2p market will be worth $897.85 billion by the year 2024, from $26.16 billion in 2015. The market is anticipated to rise at a whopping Compound Annual Growth Rate (CAGR) of 48.2% between 2016 and 2024, while Market Research estimates the global P2P lending market to grow at a CAGR of 53.06% during the five-year period between 2016 and 2020. Morgan Stanley in a report in 2015 predicted that such marketplace lending would command $150 billion to $490 billion globally by 2020.

P2P lending in the U.S. is growing at a faster pace in comparison to other financial services, and is predicted to hit about 45% of the global market share by 2020. P2P lenders in the US generated $6.6 billion in loans in 2015, a 128% increase. The country has one of the largest P2P lending markets in the world by loan volume, but the UK’s is 72% larger on a per capita basis. Low consumer confidence in banks, a high degree of comfort with online platforms, and a positive regulatory environment have all helped mold the P2P lending market in the UK. According to the Federal Reserve Bank of Cleveland, the total amount of money lent through P2P platforms grew more than 80% quarterly from 2007 through 2014. PWC predicts the US market will reach $150 billion by 2025. The alternative finance market in Europe reached nearly €3 billion ($3.9 billion) in 2014, a 144% jump.

Europe’s alternative finance market is a mix of crowdfunding, P2P lending, and other activities, which grew by 92% in 2015. The UK represented 81% of this. The first company to offer Peer-to-Peer loans in the world was Zopa. Since its founding in February 2005, it has issued over £1.99 billion in loans.

China’s Peer-to-Peer lending market is the largest and most dynamic in the world with more than 4,000 providers operating in the market today, compared to just 50 providers at the end of 2011. Approximately, regulators revealed a figure of about $93.43 billion in China’s P2P lending market in June 2017. The small-business P2P loan volume in France grew almost 4,000% in 2015, to reach €8.2 million ($10.6 million).

Challenges

Despite growth predictions, a number of significant issues present challenges to growth. Fraudulent activities are some major challenges facing P2P lending. Fraud results in loss of investors’ confidence and trust. Statistics by the Chinese Banking Regulatory Commission showed that out of the 4,127 P2P lending platforms at the end of June 2016–1,778 were suffering from problems such Ponzi schemes. Default rates also pose threats to p2p lending. P2P platforms that may relax their rules and make loans to those at the lower end of the credit spectrum may suffer from high default rates.

Regulations

Several countries in Europe have introduced changes to alternative finance regulations as an attempt to regulate the activities of these emerging platforms. The UK’s Financial Conduct Authority regulates loan-based and investment-based crowdfunding platforms by actively scrutinizing the advertising and selling of lending platforms. Investors in such platforms do not have access to Financial Services Compensation Schemes available under regular bank savings accounts. Providers of marketplace lending products and related services in Australia need to hold an Australian financial services license and a credit license. They also need to comply with the National Consumer Credit Protection Act (for consumer loans) or with the Australian Securities and Investments Commission Act 2001 (ASIC Act) for other loans.

In the U.S., P2P lending needs to be in compliance with SEC regulations and the respective state laws. The Reserve Bank of India proposed to bring P2P lending platforms under purview by defining them as NBFCs. In India, Peer-to-Peer lending is currently unregulated. The Reserve Bank of India, India’s Central Bank, has created a consultation paper to regulate P2P lending and the final guidelines are expected soon. There were over 30 Peer-to-Peer lending platforms operating in India as of 2016.

China’s leniency towards internet-based lending in the initial years resulted in the mushrooming of such platforms, many of which indulged in fraudulent schemes and activities. As a result, the government built a policy framework in July 2015 as a guidance for encouraging the development of such platforms amid moderately loose regulatory policies. In August of 2016, China issued an aggressive set of measures to restrain the spread of problematic online lending platforms while ensuring that the sector is cleaned up by making such firms exit.

The Future Of P2P Lending

While P2P platforms continue to face the risks of defaults, fraudulent practices, or borrower’s turning to banks, the growth prospects of this segment remain strong. A well-regulated and transparent p2p platform offers great opportunities as an alternative investment for loan providers, as well as for borrowers. Therefore, the future of P2P lending will be determined by factors such as the rise in interest rates, competition from banks, and the consumer market size.