Also known as crowdlending, this digital form of debt financing has opened up traditional financial services to markets that were previously untapped. Small to medium sized businesses can now get funding outside of financial institutions and the average individual now able to invest directly in private companies without having to pay hefty fees. What are the top platforms? What are the pros and cons? Before you dive head first into the realm of P2P lending, let us lay out some of the more pertinent kinks of the business.
Unlike your traditional banks, P2P lending platforms do not own an existing pool of funds to pay out loans. Instead, they match lenders directly with borrowers. Lenders enjoy a higher interest rate compared to their savings accounts at banks. Borrowers on the other hand get lower interest rates than the offers made by bank loan officers, as well as a simpler and more streamlined loan approval process. The interest rates that both parties of the transaction enjoy can either be set by the P2P platform or by the lenders themselves in a ‘reverse auction’, where the borrowers list the highest interest rate they can afford, and lenders try to outbid each other to offer the borrower the lowest rate possible.
To certify the borrower’s creditworthiness, most P2P lending platforms will verify identities and run background checks and credit analyses before approving loan requests. Few platforms will shift the onus to the lenders to check user reviews (not surprisingly, this model has proven to be less appealing).
The lack of institutional bodies governing the transactions has been a boon and a bane to the P2P industry. Although users enjoy quicker processes and better interest rates, the lack of compliance and regulation has caused problems for users. As such, many platforms are now partnering with banks to lend some security and credibility to their digital transactions.
Currently, this is how most P2P lending platforms operate:
Image from Business Insider Singapore.
So now that you have a rough idea of how P2P lending works and how you can make money off of it, which platforms should you join? Who are the biggest players around the world? China has had a long history of microloans – a response to the difficulty small businesses and individuals face when negotiating loans with state-owned banks. While not perfected, China bore the first iterations of P2P lending platforms. The popularity of the online lending craze caught on quickly, and the industry has mushroomed to over 3,000 P2P lending platforms in China. Here are some of the bigger P2P players around the world.
Popular P2P Players
Every platform has its own unique selling points and it would be best to conduct sufficient research into each one before deciding to lend or borrow.Information obtained on 31 March 2017.
P2P lending has been around for quite a while, but its governance is only starting to take shape. Many lenders and borrowers are drawn to the attractive rates but fail to see the immense risk that comes along with the omission of the middle man.
The Risks of P2P Lending
Many are still wary of the risks that come with P2P lending. In 2014, Chinese platform, Ezubao, launched a massive campaign to get Chinese citizens to invest in the platform, attracting a total of RMB 50 billion in funds from 900,000 investors. By the end of 2015, the platform stopped trading, and it was revealed that Ezubao was nothing more than a Ponzi scheme. Even the US’ most prolific platform, Lending Club, had to oust their CEO for the improper sale of loans for the purpose of his own interests.
While most P2P lending platforms aren’t out to deliberately pull a quick con, they are unable to prevent their borrowers from doing so. The lack of stringent checks and credit history has caused a significantly higher number of payment defaults as compared to bank loans.
In light of the recent debacles, governments have stepped in to impose stricter regulations, and many platforms have sought partnerships with banks to leverage on their compliance and clients’ credit histories.
Due diligence and diversification is key to making sound investments through P2P lending.
If the risks of P2P lending is too much for you to bear, there are less risky alternative investment platforms which produce lower returns like equity crowdfunding, property crowdfunding and startup stock exchanges.