Peer-to-peer lending

Overview

Peer-to-peer lending (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 (tax-disadvantaged in the UK vs charging borrowers) or borrowers (either a fixed amount annually or a percentage of the loan amount). 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 institutions – deposit takers, investors, insurers – and 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. Early peer-to-peer lending was also characterized by disintermediation and reliance on social networks but these features have started to disappear. While it is still true that the emergence of internet and e-commerce makes it possible to do away with traditional financial intermediaries and that people may be less likely to default to the members of their own social communities, the emergence of new intermediaries has proven to be time and cost saving. Extending crowdsourcing to unfamiliar lenders and borrowers opens up new opportunities. 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 (marketing)

United Kingdom

Zopa, 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 (IFISA) 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 (FSCS), 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 (Entrenching Innovation Report), £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 (SEC) 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 (without knowing the actual identities of borrowers) 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 (Electronic Data-Gathering, Analysis, and Retrieval). 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 (US$29 billion) 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 (P2P) lending platforms, tuandai.com, collapsed, resulting in financial losses for scores of Chinese investors. By August 2020 the number of licensed P2P lenders in China had been cut to 29, and defunct platforms still owed depositors 800 billion yuan (US$115 billion). By mid-November 2020 no P2P lenders were still operating, down from a peak of 5,970 in 2017.

Australia

In 2012 Australia's first peer to peer lending platform, SocietyOne, was launched. As of June 2016 the Australian Government has been encouraging the development of financial technology and peer to peer lending startups through its regulatory sandbox program.

New Zealand

In New Zealand, peer-to-peer lending became practicable on April 1, 2014, when the relevant provisions of the Financial Markets Conduct Act 2013 came into force. The Act enables peer-to-peer lending services to be licensed. The Financial Markets Authority issued the first peer-to-peer lending service licence on July 8, 2014, to Harmoney. Harmoney officially launched its service on October 10, 2014.

India

In India, peer-to-peer lending is currently regulated by the Reserve Bank of India, India's Central Bank. It has published a consultation paper on regulation of P2P lending and the final guidelines were released in 2017. There were over 30 peer-to-peer-lending platforms in India in 2016. Even with first-mover advantage many sites were not able to capture market share and grow their user base, arguably because of the reserved nature of Indian investors or lack of awareness of this type of debt financing. However, peer-to-peer lending platforms in India are helping a huge section of borrowers who have previously been rejected or have failed to qualify for a loan from banks. As on August 31, 2019, 19 companies have been granted licenses by the Reserve Bank of India.

Sweden

Peer-to-peer-lending in Sweden is regulated by Finansinspektionen. Launched in 2007, the company Trustbuddy AB was first out on the Swedish market for peer-to-peer-lending, providing a platform for high risk personal loans between 500SEK and 10,000SEK. Trustbuddy filed for bankruptcy by October 2015, a new board cited abuses by outgoing leadership.

Israel

Several peer-to-peer lending services initiated operation and loan origination during 2014, Following the economic uprising of 2011, and public opinion regarding these platforms is positive. The maximum interest rate in Israeli P2P Arenas is limited by the "Extra-Banking Lending Regulations".

Canada

Loans made under peer-to-peer lending are considered securities and as such P2P platforms must register with securities regulators and adapt themselves to existing regulatory models. This means limiting investors to some institutional investors or finding novel approaches in tandem with regulators. Canadian Capital Markets Securities Regulators (members of the Canadian Securities Administrators) are recent entrants to Canadian Peer-to-Peer P2P lending and are only issuing interim approvals "in order to test their products, services and applications throughout the Canadian market on a time limited basis." through "Regulatory Sandbox" programs including the CSA Regulatory Sandbox and the Ontario Securities Commission Sandbox, branded as "OSC Launchpad".

Brazil

Since April 2018, Brazilian p2p lending companies may operate directly without the intermediation of a bank or other financial institution. By means of the Resolution 4656/2018, the Central Bank of Brazil created a new type of institution called SEP (personal lending society) that aims to provide a platform for direct negotiation of loans between individuals and companies. A SEP cannot lend using its own resources but only operate as an intermediary. The borrower must be Brazilian individual or company, but there isn't a restriction regarding lenders nationality.