The wave of disruptions in the financial sector gained strength after the global financial crisis of 2008-09. While the heavy losses forced banks to become stricter about loan disbursements, the chaos and fragility in the system caused dissatisfaction with commercial banks among borrowers.
According to Reuters, “twenty of the world's biggest banks have paid more than $235 billion in fines and compensation in the seven years period (2008-2015) for a litany of misdeeds, ranging from fines for manipulation of currency and interest rate markets to compensation to customers who were wrongly sold mortgages in the United States or insurance products in Britain.”
The time consuming, lengthy and rigid procedures of ‘exposed’ banks made way for more innovative lending and borrowing options. The result was the rise of peer-to-peer (P2P) or marketplace lending which offer simplified and quick procedures, quick lending decisions and better interest rate deals for borrowers as well as lenders, with more transparency.
Today, P2P platforms are among the fastest growing segment in the financial services space. Some of the well-known marketplaces in the U.S. and Europe are LendingClub Corporation (LC), Zopa, Prosper Marketplace, Upstart, Funding Circle, CircleBack Lending, Peerform, Pave, Daric, Borrowers First, SoFi, Ratesetter and Auxmoney.
Market Size & Growth Projections
The market for alternate finance gained popularity in recent years. A finding by Transparency Market Research suggests that “the opportunity in the global peer-to-peer market will be worth $897.85 billion by the year 2024, from $26.16 billion in 2015. The market is anticipated to rise at a whopping CAGR [Compound Annual Growth Rate] of 48.2% between 2016 and 2024.”
While Research and Markets estimates the global P2P lending market to grow at a CAGR of 53.06% during the five year period between 2016 and 2020. Morgan Stanley in a report in 2015 predicted that such marketplace lending would command $150 billion to $490 billion globally by 2020.
While the P2P lending in the U.S. is still in its infancy, it is growing at a faster pace in comparison to other financial services. China’s peer-to-peer lending market is the largest and the most dynamic in the world with more than 4,000 providers operating in the market today compared to just 50 providers at the end of 2011. Although there isn’t much insight into verifiable numbers in China’s market, in June, regulators revealed a figure of about $93.43 billion.
Europe’s alternative finance market is a mix of crowdfunding, P2P lending and other activities, grew by 92% in 2015. A very recent report by Cambridge in collaboration with KPMG points out that P2P consumer lending at €366 million volume in 2015 is the largest market segment of alternate finance while P2P business lending at €212 million ranks second in the segment.
Challenges & Regulations
While the growth projections for peer-to-peer lending are promising, the journey to that destination isn’t easy. One of the major challenges is managing fraudulent activities and malpractices as they result in loss of investor confidence and trust. These can only be tapped when there are certain regulations guiding these platforms.
In Europe, several countries have introduced changes to alternative finance regulations as an attempt to regulate the activities of these emerging platforms. In the United Kingdom, Financial Conduct Authority (FCA) regulates loan-based and investment-based crowdfunding platforms. In fact, the FCA is actively scrutinizing lending platforms amid concerns of wrong advertising and mis-selling. Investors in such platforms do not have access to Financial Services Compensation Schemes available under regular bank saving accounts.
In Australia, providers of marketplace lending products and related services need to hold an Australian financial services license and a credit license They also need to comply with National Consumer Credit Protection Act (for consumer loans) or Australian Securities and Investments Commission Act 2001 (ASIC Act) for other loans.
Meanwhile, in the U.S., such platforms need to be in compliance with SEC regulations and further have to be in sync with the respective state laws.
In India, the Reserve Bank of India issued a consultation paper in April where it proposed to bring P2P lending platforms under the purview by defining them as NBFCs.
China has been liberal towards internet based lending in the initial years, as a result of which, such platforms mushroomed, many of which indulged in fraudulent schemes and activities. The first major step by the Chinese government to build a policy framework was initiated in July 2015 as a guidance policy which looked to encourage the development of such platforms amid moderately loose regulatory policies.
Realizing that trouble was brewing, in August 2016, regulators in China issued an aggressive set of measures to restrain the spread of problematic online lending platforms while ensuring that the sector is cleaned up by making such firms exit. Statistics by CRBC showed that out of the 4,127 P2P lending platforms (end of June 2016), 1,778 were suffering from problems such as poor management, capital constraints or were a Ponzi scheme.
While the peer-to-peer (P2P) platforms continue to face the risk of default, fraudulent practices or borrower’s turning to banks, the growth prospects of this segment remain strong, especially in times when the banking sector continues to struggle with lingering damages. Thus, a well-regulated and transparent peer-to-peer platforms offer great opportunities as an alternative investment for loan providers as well as for borrowers – both in retail and small businesses.