P2P lending on a global scale

The world saw the effects of the 2008 financial crisis, where banks began to impose stricter laws against consumer lending. Quick and simple loans became tough to acquire. Even those with a good credit history found it challenging to acquire loans. As the loan approval processes became longer and the criteria for credit assessment tighter, it opened the door to alternative financing, bringing about the rise of the peer-to-peer (P2P) lending space.

P2P lending these days has a huge focus on technology, utilizing online platforms to connect borrowers and investors. By incorporating the use of technology into finance, credit approvals and loan processes have been made quicker and more efficient. With that, P2P lending has seen a steady growth globally and has been recognized as one of the fastest growing areas in alternative financing. How long will this growth continue?

Blog image-1.jpgThe growth of P2P lending

Since its concept originated back in 2005 with Zopa in the UK, P2P lending has grown at an astonishing pace. In 2016 alone, P2P lending generated more than $200 billion worth of investments worldwide. The concept helps the underserved or underbanked individuals and businesses access alternate sources of financing, connecting individuals which have a surplus of cash to business owners who are looking for loans. These loans are then packaged in the form of investments for these individuals to fund.

What was previously considered as simply a form of alternative finance has begun entering the mainstream. Despite the fact that the P2P lending industry has yet to fully mature, it has shown great promise and potential for growth in the future.

Thus far, the industry has been progressing consistently. As default rates stabilize, and recognition increases, the P2P market is seen to continue its steady growth.

Global recognition and projections

Globally, the P2P lending market has started to become recognized for its potential and growth. While the industry has yet to fully mature, it has already created high volumes of investment opportunities internationally. Possibly due to the inherent financing gaps and borrowers’ increased interest in seeking out alternative sources of financing.

The concept of P2P is viewed differently around the world. For instance, Canada and UK regulate P2P platforms as an intermediary, while in France and Germany, it is regarded as similar to banks. In the US, however, regulations vary from state to state. For China, having the largest P2P lending market globally, they have practically integrated P2P lending to become a staple in their financing scene.

Despite these differences, one thing in common for P2P lending worldwide is their growth projections. Transparency Market Research suggests that the opportunity in the global P2P market will be worth $897.85 billion by the year 2024, from $26.16 billion in 2015. It is also predicted to hit about 45% of the global share market by 2020.

How-P2P-Lending-Works.pngChallenges for the industry

As promising as the P2P lending market might seem right now, there are still several nooks and crannies that need to be worked out for this young industry to reach its fullest potential.

  1. Fraudulent risks may dissuade investors from trusting their money with P2P lending platforms. Despite its popularity, P2P lending is still viewed as an alternative source of investment. Thus, investors might not be too willing to invest with such platforms. Statistics by the Chinese Banking Regulatory Commission showed that out of the 4,127 P2P lending platforms at the end of June 2016, 1,778 were suffering from problems such as Ponzi schemes. Therefore, investors should choose platforms that have safeguards in place against such risks. One example would be Funding Societies, who engage a third-party escrow agency to handle all funds from investors.
  2. Loan default rates pose a huge threat to the market. The industry would have to work a way between regulating interest rates and the ability to make repayments. Ensuring that they continue to uphold a stringent credit assessment criteria and keep default rates as low as possible. For instance, Funding Societies, Southeast Asia’s ’s leading P2P lending platform, has the lowest default rate in its region at 1.3%.
  3. Competition from banks and other financial institutions would limit the volume of loans that the industry has access to. Traditionally, business owners would look to acquire funds from banks rather than considering alternative solutions, like P2P lending. They might not even consider taking up a loan with P2P lending platforms, considering the comparably higher interest rates that comes attached to P2P loans. As a result, P2P lending platforms might lose out on a market share of borrowers. Although P2P lending currently targets businesses who are underserved and underbanked, there could potentially be a partnership in the long run between the two, working out how they can mutually support each other’s field of work.

All in all, while P2P lending is still fairly adolescent, it has shown great promise in its future. As with any market growth, there are risks. But as long as P2P platforms continue to safeguard themselves against such risks, and continue to innovate and improve, the future of P2P lending should continue to shine brightly.

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This article was written by Funding Societies, Singapore’s leading peer-to-peer (P2P) lending platform. We provide working capital loans for small and medium-sized enterprises (SMEs), along with attractive investment opportunities to the broader public. To learn more about us, click on our website.

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