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7 Important Questions about P2P Lending Answered

Peer to peer (P2P), or marketplace lenders, are known as the matchmakers of the fintech world. They pair borrowers with investors and this format has led to the lending industry being the fastest growing sector in financial technology to date. A recent Morgan Stanley report revealed that lending has risen by a staggering 123% a

  • Madhvi Mavadiya
  • February 4, 2016
  • 4 minutes

Peer to peer (P2P), or marketplace lenders, are known as the matchmakers of the fintech world. They pair borrowers with investors and this format has led to the lending industry being the fastest growing sector in financial technology to date. A recent Morgan Stanley report revealed that lending has risen by a staggering 123% a year since 2010 and this growth is set to continue with expectations of the industry being worth at least $290 million by 2020.

As this form of fintech allows investors to bypass banks, traditional legacy players are entering the space, as was evidenced by JPMorgan which is planning to partner with one of the biggest US based online lenders, OnDeck Capital. PwC’s “Peer pressure: How peer-to-peer lending platforms are transforming the consumer lending industry” encapsulates all there is to know about online lending and the top ten questions investors have are answered below.

1. How does it work?

While traditional banks lend their own funds, marketplace lending Internet platforms act as a matchmaker between borrowers who are seeking a loan and investors who are looking to invest.

2. How does it make money?

Because borrowers have to pay origination fees and investors are charged with a portion of the interest, P2P platforms will generate revenue but there are benefits to be had with these additional fees. “Investors generate revenue from the remaining portion of the interest that borrowers pay on the loan. Borrowers benefit from a streamlined application process, quick funding decisions, and 24/7 access to the status of their loan,” as the PwC report explored.

3. Is there potential for more growth?

PwC highlight that although this industry is still in its infancy, there is huge potential for growth as the financial sector is taking online lending seriously. P2P platforms in the US issued approximately $5.5. billion in loans in 2014 and analysis conducted by PwC indicated that the market could reach higher than $150 billion by the year 2025.

4. Can P2P lenders withstand competition?

It could be said that this industry has excelled in the aftermath of the financial crisis when many borrowers and investors alike were looking for alternative methods. However, PwC states that this attitude could be changed as banks are looking to expand their lending services after recent earnings announcements. “The increasing availability of credit from banks will drive stronger competition and put pricing pressure on P2P platforms,” the report said, which could cause problems for online lenders.

Banks could leverage their vast network of branches and relationship managers to lure customers who still value physical presence and personal relationships.”

5. Should banks purchase or form alliances with online lenders?

With news of JPMorgan’s and OnDeck Capital’s imminent partnership, it questions whether it would be better for banks to oversee operations at fintech companies, or to work together to provide a good overall service. “When deciding which approach to take, financial institutions must make a strategic decision: view P2P lending as a threat, or view it as an opportunity?” The report explores how this is a question that must be answered on a case by case basis as there are many different ways that a bank and a marketplace lender could collaborate.

6. How can we ensure security?

In 2014, the UK Financial Conduct Authority (FCA) released a statement which describes how crowdfunding will be regulated and it is rumoured that this may act as a proxy for upcoming rules for P2P lending in the US. The rapid rate of innovation and change makes this business a risky one with banks and other traditional lenders acting as competitors, on top of having to comply with regulation. “P2P platforms should take proactive steps to prepare for these challenges in the near future,” PwC warned.

7. What’s next for marketplace lending?

PwC says that millennials are prime targets for P2P lenders because they have grown up in a world that is distrustful of banks and value the convenience of transacting online.  In addition to this, consumers are seeking out investment products that produce higher returns than what the traditional banks can offer. “P2P platforms have an opportunity to transition from “niche offering” to “major player” in consumer lending and compete directly for borrowers across the full range of products, credit tiers, and markets.”

Read the full PwC report here