P2P lending is probably the crowdfunding sector that is growing the fastest. One of the main reason is that the situation, at least in the US, seems to be favorable given that unemployment is low, people are consolidating debt and improving their personal financial balance sheets, while investors are hungry for yields and cash flow every month.
At the moment, most of the loans that take place on P2P platforms are consumer loans, above all credit card debt settlements. However, recently, the demand for small business loans has grown significantly opening up a new business opportunity for the incumbents and the new players.
The Challenges Of P2P Lending
Even if the market of P2P lending looks very promising, there are still components of the market that need to be addressed:
- Market liquidity. The market is not liquid, since a secondary market does not yet exist where lenders can sell their investments, instead of holding on to them through their tenures of three years or more.
- Platform integrity. Trust in these new online intermediaries is essential for the market to reinforce and keep growing. Regulators can play a fundamental role in this regard, implementing a system to check the integrity of lending platforms, their credit scoring models and their reliability.
- Prevention of fraud. How platforms identify and prevent fraud is perhaps one of the most important concerns for P2P lending operators. Even if there is not yet a market-standard solution for this issue, especially at this stage where platforms are still relatively small, it is most likely that as the sector grows, a support network will emerge that will invest in mechanisms that can combat fraudulent activity.
An Interesting Market Opportunity
Despite the few challenges highlighted above, P2P lending seems to be developing in an interesting way. Crowd Valley believes that P2P lending will continue to grow, overcoming the obstacles and problems, and will eventually establish itself as a new legitimate asset class.
At this point one might ask: why have banks not yet directly entered the market? The reason is that banks have huge overhead, have legacy technology and would almost have to start all over with a clean slate to compete with the online platforms. However, there is still the possibility they create spin-offs that act as P2P lending platforms or that they direct investments through existing platforms.
Finally, a huge opportunity that will attract several actors as soon as it is possible is secondary markets for P2P loans. In fact, as mentioned above, one of the biggest challenges for the P2P lending markets is the lack of liquidity, and secondary markets will help to fill that requirement.
Peer-to-Peer Lending: Ready to Grow, Despite a Few Red Flags (2013). Wharton University of Pennsylvania.
P2P Lending. Wikipedia.com
Image credit to: 401(K) 2013. http://bit.ly/1fZfEHm
Born and raised in Milan, Italy, Irene is an International Business graduate, with a strong interest for innovative ideas that can simplify our lives.
During her studies, she co-founded an online community for sportspeople and worked in marketing positions at Ogilvy & Mather Advertising and at the European Business Angel Network, in Brussels. She is a passionate blogger about crowdfunding and the startup ecosystem.