Peer-to-peer lending, also abbreviated as P2P lending, is the practice of
lending
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
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
saving
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recur ...
s and
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
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
Platform may refer to:
Technology
* Computing platform, a framework on which applications may be run
* Platform game, a genre of video games
* Car platform, a set of components shared by several vehicle models
* Weapons platform, a system or ...
and
credit check
A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bu ...
ing 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 bit subcategory of
crowdfunding
Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over was raised worldwide by crow ...
. 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
In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the t ...
, 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
Collateral may refer to:
Business and finance
* Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan
* Marketing collateral, in marketing and sales
Arts, entertainment, and media
* ''Collate ...
. 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
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...
, and
factoring.
The
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
s can be set by lenders who compete for the lowest rate on the
reverse auction
A reverse auction (also known as buyer-determined auction or procurement auction) is a type of auction in which the traditional roles of buyer and seller are reversed. Thus, there is one buyer and many potential sellers. In an ordinary auction al ...
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
Bad debt, occasionally called uncollectible accounts expense, is a monetary amount owed to a creditor that is unlikely to be paid and for which the creditor is not willing to take action to collect for various reasons, often due to the debtor not ...
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 market
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
s, peer-to-peer lending tends to have both less
volatility and less
liquidity
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity, the ease with which an asset can be sold
* Accounting liquidity, the ability to meet cash obligations when due
* Liqui ...
.
Characteristics
Peer-to-peer lending does not fit cleanly into any of the three traditional types of financial institutionsdeposit takers, investors, insurers
and is sometimes categorized as an
alternative financial service
An alternative financial service (AFS) is a financial service provided outside traditional banking institutions, on which many low-income individuals depend. In developing countries, these services often take the form of microfinance. In develo ...
.
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
In computer technology and telecommunications, online indicates a state of connectivity and offline indicates a disconnected state. In modern terminology, this usually refers to an Internet connection, but (especially when expressed "on line" or ...
;
* lenders may often choose which borrowers to invest in, if the
P2P
P2P may refer to:
* Pay to play, where money is exchanged for services
* Peer-to-peer, a distributed application architecture in computing or networking
** List of P2P protocols
* Phenylacetone, an organic compound commonly known as P2P
* Poin ...
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.
Early peer-to-peer lending was also characterized by
disintermediation
Disintermediation is the removal of intermediaries in economics from a supply chain, or "cutting out the middlemen" in connection with a transaction or a series of transactions. Instead of going through traditional distribution channels, which h ...
and reliance on
social network
A social network is a social structure made up of a set of social actors (such as individuals or organizations), sets of dyadic ties, and other social interactions between actors. The social network perspective provides a set of methods for an ...
s but these features have started to disappear. While it is still true that the emergence of
internet
The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
and
e-commerce
E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain manageme ...
makes it possible to do away with traditional
financial intermediaries
A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds ...
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
Crowdsourcing involves a large group of dispersed participants contributing or producing goods or services—including ideas, votes, micro-tasks, and finances—for payment or as volunteers. Contemporary crowdsourcing often involves digita ...
to unfamiliar lenders and borrowers opens up new opportunities.
Most peer-to-peer intermediaries provide the following services:
* online
investment platform
A fund platform or investment platform is an online service that allows investments to be bought online. Fund platforms may simplify the process of investing or provide investments at a discounted rate.
Use
In many cases, investments purchased on ...
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)
History
United Kingdom
Zopa
Zopa is a British financial services company which offers deposit accounts and credit cards. It began as the world's first peer-to-peer lending company in 2005 and gained a full banking licence in 2020. The peer-to-peer side of its business cl ...
, founded in February 2005, was the first peer-to-peer lending company in the United Kingdom.
Funding Circle
Funding Circle is a commercial lender. Originally it was peer-to-peer lending marketplace that allows the public to lend money directly to small and medium-sized businesses. Through this exchange businesses access lower costs of financing than t ...
, 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
The Financial Conduct Authority (FCA) is a financial regulation, financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The ...
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
The Financial Services Compensation Scheme (FSCS) is the UK's statutory deposit insurance and investors compensation scheme for customers of authorised financial services firms. This means that FSCS can pay compensation if a firm is unable, or l ...
(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
Prosper Marketplace, Inc. is a San Francisco, California-based company in the peer-to-peer lending industry. Prosper Funding LLC, one of its subsidiaries, operates Prosper.com, a website where individuals can either invest in personal loans or r ...
, followed by
LendingClub
LendingClub is a financial services company headquartered in San Francisco, California. It was the first peer-to-peer lender to register its offerings as securities with the Securities and Exchange Commission (SEC), and to offer loan trading o ...
.
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
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity, the ease with which an asset can be sold
* Accounting liquidity, the ability to meet cash obligations when due
* Liqui ...
for these loans, most of which have a minimum three-year term, as undesirable.
In 2008, the
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC) required that peer-to-peer companies register their offerings as
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, pursuant to the
Securities Act of 1933
The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and after ...
.
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
Edgar is a commonly used English given name, from an Anglo-Saxon name ''Eadgar'' (composed of '' ead'' "rich, prosperous" and ''gar'' "spear").
Like most Anglo-Saxon names, it fell out of use by the later medieval period; it was, however, rev ...
(Electronic Data-Gathering, Analysis, and Retrieval).
More people turned to peer-to-peer companies for borrowing following the
financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
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 5.6–35.8%, 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
E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain manageme ...
grew in the 2000s, many P2P lenders were founded with various target customers and business models.
The first P2PL in
Hong Kong
Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China ( abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delt ...
was
WeLab, which has backing from American venture capital firm
Sequoia Capital
Sequoia Capital is an American venture capital firm. The firm is headquartered in Menlo Park, California, and specializes in seed stage, early stage, and growth stage investments in private companies across technology sectors. , Sequoia's total a ...
and
Li Ka-Shing
Sir Ka-shing Li (; born 13 June 1928) is a Hong Kong billionaire business magnate, investor, and philanthropist. As of June 2019, Li is the 31st richest person in the world, with an estimated net wealth of US$33.4 billion. He is the senior ad ...
'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
A Ponzi scheme (, ) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Named after Italian businessman Charles Ponzi, the scheme leads victims to believe that profits are comin ...
. Ezubao took in 50 billion
renminbi
The renminbi (; symbol: ¥; ISO code: CNY; abbreviation: RMB) is the official currency of the People's Republic of China and one of the world's most traded currencies, ranking as the fifth most traded currency in the world as of April 2022. ...
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 market
A grey market or dark market (sometimes confused with the similar term " parallel market") is the trade of a commodity through distribution channels that are not authorized by the original manufacturer or trade mark proprietor. Grey market pr ...
s 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
The People's Bank of China (officially PBC or informally PBOC; ) is the central bank of the People's Republic of China, responsible for carrying out monetary policy and regulation of financial institutions in mainland China, as determined by ...
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.
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
Fintech, a portmanteau of "financial technology", refers to firms using new technology to compete with traditional financial methods in the delivery of financial services. Artificial intelligence, blockchain, cloud computing, and big data are ...
and peer to peer lending startups through its 'regulatory sandbox' program.
New Zealand
In
New Zealand
New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island count ...
, 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
India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
, peer-to-peer lending is currently regulated by the
Reserve Bank of India
The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible for ...
, 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
In marketing strategy, first-mover advantage (FMA) is the competitive advantage gained by the initial ("first-moving") significant occupant of a market segment. First-mover advantage enables a company or firm to establish strong brand recognition ...
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.
Latvia
Latvian P2P lending market is developing rapidly. In Q2 2018 Latvian P2P platforms lent Eur 271.8 million and Eur 1.7 Billion cumulatively. Currently, the most active investors in Latvia's peer-to-peer lending platforms are residents of Germany, Great Britain, and Estonia.
The two biggest P2P platforms are Mintos and Twino taking over 60% and 20% of market share respectively. Around nine companies that qualify as P2P investment platform currently operate in Latvia. Mintos was founded in 2015. In September 2018 the total amount of loans funded through Mintos have surpassed Eur 1 billion. Most of the loans funded through Mintos are personal loans with car loans coming second. In 2016 Mintos has raised Eur 2 million in funding from Latvian-based Venture Capital Skillion Ventures. Twino investment platform was launched in 2015, although the company has been operating since 2009 as a loan originator. Since the inception in 2009 Twino has lent more than Eur 500 million in loans. More than 90% of all loans that are on Twino platform are short maturity from one to three months.
In 2015, the Ministry of Finance of Latvia initiated development of a new regulation on the peer-to-peer lending in Latvia to establish regulatory requirements, such as rules for management compliance, AML requirements and other prudential measures.
Ireland
The Irish P2P lending platform
Linked Finance was launched in 2013. In 2016, Linked Finance was also authorised to operate in the UK by the Financial Conduct Authority. In 2015, Initiative Ireland launched the first property-backed secured lending P2P platform in Ireland.
Indonesia
In Indonesia, P2P lending is growing fast in recent years and is regulated under
OJK since 2016. As of April 2019, there are 106 P2P platforms registered in OJK. P2P platforms provide loans targeting particularly into unbanked population, which is estimated to be around 100+ million in Indonesia.
Thousands of P2P platforms are illegal. Their applications are believed to be stealing customer's data such as phone contacts and photos. These are then used by the debt collectors to intimidate the customers. The debt collectors contact family members, friends, and even employers of the customers then telling them that the customers have debt that needs to be paid. Some of them commit suicide due to the pressure. Many cases are reported in the Indonesia's complaint handling system.
Yet the police have not taken serious actions against these cases.
Bulgaria
There is no specific Peer-to-Peer lending regulation in Bulgaria. Currently, Klear Lending is the only Bulgarian platform. It was launched in 2016 and provides personal loans to prime customers. The Peer-to-Peer lending platform is operated by Klear Lending AD, a financial institution registered in the Register per art. 3a of the Credit Institutions Act maintained by the Bulgarian National Bank.
Korea
In Korea, Money Auction and Pop Funding are the very first peer to peer lending companies founded in 2006 and 2007 respectively. Korean P2P lending industry did not attract much public attention until late 2014 and early 2015, during which period a number of new fintech companies were founded underpinned by the global fintech wave with the emergence of Lending Club as the mainstream P2P lending player in the US. New P2P lending companies launched in Korea during this period include 8 Percent, Terafunding, Lendit, Honest Fund and Funda. At the beginning, 8 Percent, Lendit and Honest Fund focused on personal loan origination and Terafunding was the only P2P platform dedicated to the real estate backed loan origination, founded by ex-real estate broker and investor, Tae Young Yang.
There was a brief period of regulatory uncertainty on the P2P business model as the P2P lending model was not officially legalized under the then regulatory regime. 8 percent was briefly shut down by the regulator in Feb 2015 and was reopened again. Korean P2P industry saw an explosive growth in a year. According to the regulator, cumulative P2P lending platform loan origination increased to KRW 311,800,000,000 as of December in 2016 from KRW 72,400,000,000 in March and there was a debate as to whether the industry was getting overheated, with questions on whether the industry offered appropriate investor protection. To respond to these concerns, as of February 2017, Korean regulator imposed an annual investment limit of KRW 10,000,000 for a retail investor on these lending platforms, and KRW 40,000,000 for certain qualified investors.
As of April 2017, there are 148 P2P lending companies in Korea. However, only 40 companies are official members of the Korea P2P Finance Association. These members include Lendit, Roof Funding, Midrate, HF Honest Fund, Villy, 8 Percent, Terafunding, Together Funding and People Funding. According to the Korea P2P Finance Association, cumulative loan lent by its member P2P companies stands at c. KRW 2.3 TRN as of March 2018. By origination category, real estate project financing origination constitutes c. KRW 768,500,000,000, real estate asset backed origination is KRW 611,500,000,000, other asset backed KRW 472,400,000,000 and personal loan origination stands at KRW 443,200,000,000. Average interest yield offered by the member companies is 14.32%.
Germany
In Germany, P2P lending is growing fast in recent years and is regulated under
Federal Financial Supervisory Authority
The Federal Financial Supervisory Authority (german: Bundesanstalt für Finanzdienstleistungsaufsicht, Bundesanstalt für Finanzdienstleistungsaufsicht) better known by its abbreviation BaFin is the financial regulatory authority for Germany. It ...
. The transaction volume will reach an estimated value of €252 million in 2020.
Legal regulation
In many countries, soliciting investments from the general public is considered illegal.
Crowd sourcing
Crowdsourcing involves a large group of dispersed participants contributing or producing goods or services—including ideas, votes, micro-tasks, and finances—for payment or as volunteers. Contemporary crowdsourcing often involves digit ...
arrangements in which people are asked to contribute money in exchange for potential profits based on the work of others are considered to be
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
.
Dealing with financial securities is connected to the question of ownership: in the case of person-to-person loans, the problem is who owns the loans (notes) and how that ownership is transferred between the originator of the loan (the person-to-person lending company) and the individual lender(s).
This question arises especially when a peer-to-peer lending company does not merely connect lenders and borrowers but also borrows money from users and then lends it out again. Such activity is interpreted as a sale of securities, and a broker-dealer license and the registration of the person-to-person investment contract is required for the process to be legal. The license and registration can be obtained at a securities regulatory agency such as the U.S.
Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC) in the U.S., the
Ontario Securities Commission
The Ontario Securities Commission (OSC) is a regulatory agency which administers and enforces securities legislation in the Canadian province of Ontario. The OSC is an Ontario Crown agency which reports to the Ontario legislature through the Minis ...
in Ontario, Canada, the Autorité des marchés financiers in
France
France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
and
Québec, Canada
Quebec ( ; )According to the Canadian government, ''Québec'' (with the acute accent) is the official name in Canadian French and ''Quebec'' (without the accent) is the province's official name in Canadian English is one of the thirteen p ...
, or the
Financial Services Authority
The Financial Services Authority (FSA) was a quasi-judicial body accountable for the financial regulation, regulation of the financial services industry in the United Kingdom between 2001 and 2013. It was founded as the Securities and Investmen ...
in the UK.
Securities offered by the U.S. peer-to-peer lenders are registered with and regulated by the SEC. A recent report by the U.S. Government Accountability Office explored the potential for additional regulatory oversight by Consumer Financial Protection Bureau or the Federal Deposit Insurance Corporation, though neither organization has proposed direct oversight of peer-to-peer lending at this time.
In 2016, New York state sent "warning letters" threatening to require 28 peer-to-peer lenders to obtain a license to operate unless they "immediately" complied with responses to demands to disclose their lending practices and products available in the state.
In the UK, the emergence of multiple competing lending companies and problems with
subprime loans has resulted in calls for additional legislative measures that institute minimum capital standards and checks on risk controls to preclude lending to riskier borrowers, using unscrupulous lenders or misleading consumers about lending terms.
Advantages and criticism
Interest rates
One of the main advantages of person-to-person lending for borrowers can sometimes be better rates than traditional bank rates can offer.
[Social Lending Network](_blank)
, accessed September 21, 2010 The advantages for lenders can be higher returns than obtainable from a savings account or other investments, but subject to risk of loss, unlike a savings account.
[Person-to-person lending online gathers steam](_blank)
Associated Press, November 27, 2007. Interest rates and the methodology for calculating those rates varies among peer-to-peer lending platforms. The interest rates may also have a lower volatility than other investment types.
Socially-conscious investment
For investors interested in socially conscious investing, peer-to-peer lending offers the possibility of supporting the attempts of individuals to break free from high-rate debt, assist persons engaged in occupations or activities that are deemed moral and positive to the community, and avoid investment in persons employed in industries deemed immoral or detrimental to community.
Credit risk
Peer-to-peer lending also attracts borrowers who, because of their credit status or the lack thereof, are unqualified for traditional bank loans. Because past behavior is frequently indicative of future performance and low credit scores correlate with high likelihood of default, peer-to-peer intermediaries have started to decline a large number of applicants and charge higher interest rates to riskier borrowers that are approved.
It seemed initially that one of the appealing characteristics of peer-to-peer lending for investors was low default rates, e.g. Prosper's default rate was quoted to be only at about 2.7% in 2007.
The actual default rates for the loans originated by Prosper in 2007 were in fact higher than projected. Prosper's aggregate return (across all credit grades and as measured by LendStats.com, based upon actual Prosper marketplace data) for the 2007 vintage was (6.44)%, for the 2008 vintage (2.44)%, and for the 2009 vintage 8.10%. Independent projections for the 2010 vintage are of an aggregate return of 9.87. During the period from 2006 through October 2008 (referred to as 'Prosper 1.0'), Prosper issued 28,936 loans, all of which have since matured. 18,480 of the loans fully paid off and 10,456 loans defaulted, a default rate of 36.1%. $46,671,123 of the $178,560,222 loaned out during this period was written off by investors, a loss rate of 26.1%.
Since inception, Lending Club's default rate ranges from 1.4% for top-rated three-year loans to 9.8% for the riskiest loans.
The UK peer-to-peer lenders quote the ratio of bad loans at 0.84% for Zopa of the £200m during its first seven years of lending history. As of November 2013, Funding Circle's current bad debt level was 1.5%, with an average 5.8% return after all bad debt and fees. This is comparable to the 3–5% ratio of mainstream banks and the result of modern credit models and efficient risk management technologies used by P2P companies.
At the other end of the range are places such as Bondora that do lending to less credit-worthy customers, with default rates varying up to as high as 70+% for loans made to Slovak borrowers on that platform, well above those of its original Estonian market.
Government protection
Because, unlike depositors in banks, peer-to-peer lenders can choose themselves whether to lend their money to safer borrowers with lower interest rates or to riskier borrowers with higher returns, in the US peer-to-peer lending is treated legally as investment and the repayment in case of borrower defaulting is not guaranteed by the federal government (U.S.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cred ...
) the way bank deposits are.
A class action lawsuit, ''Hellum v. Prosper Marketplace, Inc.'', was held in Superior Court of California on behalf of all investors who purchased a note on the Prosper platform between January 1, 2006, and October 14, 2008. The plaintiffs alleged that Prosper offered and sold unqualified and unregistered securities, in violation of California and federal securities laws during that period. Plaintiffs further allege that Prosper acted as an unlicensed broker/dealer in California. The Plaintiffs were seeking rescission of the loan notes, rescissory damages, damages, and attorneys' fees and expenses. On July 19, 2013, the class action lawsuit was settled. Under the settlement terms Prosper will pay $10 million to the class action members.
Peer-to-peer lending sponsors
Peer-to-peer lending sponsors are organizations that handle loan administration on behalf of others including individual lenders and lending agencies, but do not loan their own money.
Notable peer-to-peer lending sponsors include:
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Kiva
A kiva is a space used by Puebloans for rites and political meetings, many of them associated with the kachina belief system. Among the modern Hopi and most other Pueblo peoples, "kiva" means a large room that is circular and underground, ...
*
Lendwithcare
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MYC4 (defunct)
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Vittana
Vittana was a non-governmental organization that allowed people to lend money via the Internet to students in the developing world.Rao. L. (2010). ''Vittana Applies The Kiva Model To Help Finance Education In Developing Countries''. Retrieved Marc ...
(defunct)
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Wokai (defunct)
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Zidisha
Zidisha allows people to lend small amounts of money directly to entrepreneurs in developing countries. It is the first peer-to-peer microlending service to link borrowers and lenders across international borders without a local microfinance ins ...
See also
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Alternative finance
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Alternative financial services
An alternative financial service (AFS) is a financial service provided outside traditional banking institutions, on which many low-income individuals depend. In developing countries, these services often take the form of microfinance. In develop ...
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Comparison of crowdfunding services
Crowdfunding is a process in which individuals or groups pool money and other resources to fund projects initiated by other people or organizations "without standard financial intermediaries." Mollick, E. (2014). ''The dynamics of crowdfunding: A ...
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Customer to customer
Customer to customer (C2C or consumer to consumer) markets provide a way to allow customers to interact with each other. Traditional markets require business to customer relationships, in which a customer goes to the business in order to purchas ...
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Non-bank financial institution
A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFC facilitate ba ...
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Peer-to-peer banking
Peer-to-peer banking is a term used in the blockchain banking industry and designates an act of transfer of value without the need of an intermediary such as a bank.
Peer-to-peer banking is an online system that allows individual members to compl ...
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Self-Organized Funding Allocation
Self-organization, also called spontaneous order in the social sciences, is a process where some form of overall order arises from local interactions between parts of an initially disordered system. The process can be spontaneous when suffic ...
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Peer-to-peer lending companies
Peer-to-peer (P2P) computing or networking is a distributed application architecture that partitions tasks or workloads between peers. Peers are equally privileged, equipotent participants in the network. They are said to form a peer-to-peer n ...
References
{{DEFAULTSORT:Peer-To-Peer Lending
Loans
Collaborative finance
Credit
Social economy
Peer-to-peer
Financial technology
Crowdfunding