Today’s technology development has created new opportunities for everyone. An example is financial inclusion wherein services are applicable to individuals and small companies can acquire funds to continue businesses. Another solution available today is “Peer-to-Peer lending” or P2P lending. This is a lending system wherein small-scale lenders and borrowers can connect and process their loans via the system under their terms and conditions. This is a great option that benefits both individual and small businesses. What is the overview of the P2P lending landscape? Let’s take a look.
P2P lending as part of today’s digital lending
Although we will be discussing on P2P lending as it is an upcoming trend in the financial sector, to gain a better perspective of lending in today’s tech era we wish to firstly review Accion’s digital lending models. Accion is a non-profit organization in financial inclusion. They have categorized the services into 7 models as follow:
- The Online Lender is a lender company with an end-to-end lending service via digital platforms. Here, borrowers and lenders don’t necessarily meet face-to-face or interact.
- P2P Lending Platform is a space where borrowers and lenders, both financial institutions and individuals, are matched by AI. The P2P platform is the middlemen in every process such as support for remittance and payment on the platform, calculations for lender and borrower evaluations, and initiate new products for clients.
- E-Commerce and Social Platform are businesses who aren’t in the financial sector but are capable of lending for usage on their platform. Examples are Amazon and WeChat who utilizes their consumer data to evaluate risks and offer products that match clients’ needs.
- Marketplace Platform is another channel that allows borrowers and lenders to meet on the digital platform. The difference from P2P lending platform is that once they are matched and remittance is completed, the two parties can directly connect and continue the remittance and payment via systems other than the marketplace platform.
- Supply Chain Lender is a solution for small businesses who purchase raw materials on the platform. The lender who is also the owner of the platform or product will offer a loan that is equal to the value of the raw materials needed for their business. This model can enforce penalties for late payment by halting product delivery or discontinuing the service on the platform.
- Mobile Money Lender is a partnership between the mobile network operators and lending companies that offer loans to clients who are using their mobile network. Borrowers can process the service via mobile applications and will receive and process payments via their operator’s service center.
- Tech-Enabled Lender is the traditional lender that embraces digital solutions to enhance operations. For example, some lenders may have storefronts, but clients can remit and process payments online.
Examples of interesting global P2P lending startups
At present, we consider P2P lending to be alternative rather than a mainstream lending service. As a result, large service providers in this sector are not financial institutions but are startups who have developed innovation as a solution for the market. Here are some of the world’s remarkable P2P lending startups:
- Lending Club is a P2P platform which began in 2010 in the USA. It is a platform for investors who seek to provide a loan to borrowers who are looking for funds. Here, investors will purchase notes on the platform, these notes are categorized by the acceptable risk. Then, the system will use the money from the investors as the loans. Once a borrower processes and remits the payment with interests, the system will share the profit as a dividend to the investor.
- Prosper is a marketplace platform P2P lending in the USA which began in 2005. It provides opportunities for investors or lenders to select their borrowers according to the terms and conditions, risks, and FICO score (USA credit scoring standard). As for the borrowers, they can offer the terms and conditions that they desire. Similarly, investors have the chance to receive a return on investment from the loan on this system. In terms of service charge, borrowers will be charged per time while investors will be charged annually.
- ZOPA is a P2P lending platform from the UK which was established in 2004. Here, investors who are lenders will need to purchase a fund package available in the system. Then, the system will allocate the money to the many borrowers in the system. Afterward, the profit will be returned to investors. The service charge is taken from the interest of the borrowers. At present, this platform has received a banking license and is preparing to launch other financial products.
- Lufax or Shanghai Lujiazui International Financial Asset Exchange is a noteworthy P2P lending platform from China which was established in 2011. The platform connects lenders and borrowers while charging a fee on both sides when there is a transaction each time. Similarly, the lender also has the opportunity to profit on this platform.
Digital lending today and tomorrow
The information above shows that each service provider has a business model which is different in its details. This is due to the different P2P lending regulatory in each region. P2P from the USA, Europe, and China all have different investment process and service charge criteria. Therefore, this information may not be a definite representation for Thailand, but it can definitely show us the issues that should be considered. Recently, the Bank of Thailand has considered starting a P2P platform for Thailand in the sandbox.
Another interesting issue is the role of big tech companies such as Alibaba, Google, and even Facebook who have both cash and consumer data. Their only remaining task is to create a channel to reach consumers via e-commerce and to collaborate with financial institutions.
Nevertheless, the key success factor of P2P lending is to make this market as safe and transparent for its users as possible, both for investors and borrowers. Financial businesses, P2P lending operators, and the government should grasp these principles in order for the service to be as beneficial as it can be. Digital Ventures have more stories regarding digital lending as well as other Fintech. Follow us for more details.