P2P: Market Outlook & Future Revolution

This report covers the size of the global P2P credit market based on various parameters and speculates on the escalating growth of the market over the forecast period 2021-2026. The report provides knowledge and analysis on key factors that are advantageous to the reader in order to understand their potential role in the different segments of the world market from a regional perspective. In its details, it takes into account a description of the essential characteristics that determine the global market.    Show Sources

The global peer-to-peer lending market (P2P) was valued at $67.93 billion in 2019 and is estimated to reach $55.891 billion by 2027, a CAGR of 2.97% from 2019 to 2027.    Show Sources

Peer-to-peer lending deals with the practice of lending directly to individuals without the involvement of banks or financial institutions. It also supports the provision of fast and convenient credit through its online platform. Lower operating costs and less risk of market for lenders and borrowers are important factors driving the growth of the global peer-to-peer lending market.    Show Sources

In addition, the introduction of digitalization in the banking sector which will make the traditional banking system more transparent is anticipated to boost growth of the global peer-to-peer lending market. Lower interest rates and a faster process make applying for a loan via P2P a pleasant experience. However, the risk of losing money, the implementation of strict government restrictions and regulations on lending, and low awareness of how P2P loans can benefit the population hamper market growth.    Show Sources

In view of these positive developments, the P2P share of unsecured consumer credit is forecast to grow at an annual rate of 4.7%, rising to 8.4% in some markets by 2020.    Show Sources

The sector is also making serious inroads into small and medium-sized enterprises (SMEs), with a target of 16% by 2020. P2P investments are thriving in the sub-$ 250K range, and banks are beginning to take note. Although the excitement is tremendous, there are many things that are misunderstood about the so-called “P2P lending industry”.    Show Sources

Early lending platforms such as Prosper and LendingClub began with a true peer-to-peer model with the bulk of the lending capital coming from institutional investors such as hedge funds, insurance companies and banks. In 2014, 81 percent of loans came from institutional investors. However, the loans issued involve many different investors, from retail investors to institutional investors.    Show Sources

Individual and professional investors benefit from being able to lend money at different interest rates based on the equity allocated by the platform. The investor finances part of the loan and distributes the amount of the loan to as many buyers as possible, thereby achieving a steady and attractive return by distributing the risk among several borrowers. P2P lending is growing rapidly as borrowers look for an alternative to banks.    Show Sources

As with other efforts to reduce the cost of financial transactions (think blockchains), everyone is talking about peer-to-peer lending (P2P). In early 2015, we expressed scepticism about the prospects for P2P lending.    Show Sources

In March 2014, The Economist published “Banking Without Banks,” which stated that peer-to-peer lending platforms (P2P) would disrupt banks and other traditional sources of capital by linking borrowers with individual lenders. The idea was that lenders and borrowers would cut out the middleman and disrupt traditional finance.    Show Sources

In recent years, the so-called P2P lending industry has seen tremendous growth, with the size of start-ups nearly doubling to $24 billion in 2014. Morgan Stanley predicts that global innovation will grow by 51 percent to a staggering $290 billion by 2020.    Show Sources

In 2017, only 49% of the population had a bank account and only 2% a credit card (World Bank, 2017a). Systemic problems in the management of financial services, low financial literacy and poor market access make it difficult for brick-and-mortar banks to reach underfunded banks (Iwasaki, 2018). Financing gaps also exist for SMEs (micro, small and medium-sized enterprises), which contribute 60% of a country’s GDP and had a funding gap of $16.6 billion in 2017 (World Banks, 2017b).    Show Sources

According to the Federal Reserve, the US has about $800 billion in unsecured consumer credit and over $500 million in small business debt, while the European Central Bank estimates that comparable figures for consumer debt in the euro zone are at least $530-600 billion. These statistics are not surprising, given the perceived inflexibility of banks and the fact that savers and borrowers enjoy poor returns. Bank of England figures calculate that small businesses in the UK have borrowed more than £130 billion to £200 billion.    Show Sources

The industry has doubled since 2010 and is now worth about $12 billion, but accounts for little more than 2% of lending to consumers and small businesses. For the big banks and their managers, the ability to lend to needy borrowers and find creative solutions for hungry depositors now looks more like a strange idea from a bygone era.    Show Sources

Many of the lending platforms have adequate risk assessment tools and processes in place. Although the return seems good relative to the opportunity cost of financing in the pre-2015 period, we argue that the effectiveness of screening and monitoring needs to be evaluated over several complete business cycles. This embodies what seems doubtful to be a competitive credit card industry when P2P lending is poor.    Show Sources

When a P2P investment platform goes bankrupt, custody of the loan is removed from the platform’s balance sheet and transferred to a third party depositary. Major platform lenders such as Prosper and Funding Circle have taken extensive measures to insulate platforms from bankruptcy risk and underlying loans. Although P2P lending will not replace banks in the immediate future if ordinary Americans want to borrow, it does just that.    Show Sources

The rapid expansion of online lending is linked to an increase in unethical and illegal business practices involving not only companies investing abroad. As a top executive at a private equity firm explained in 2016, the industry collapsed in Chinese P2P lending as gamblers migrated to Indonesia.    Show Sources

The P2P mania has attracted a number of unscrupulous players who have created P2P lending platforms as a quick and convenient way to obtain short-term financing from individual investors. Capital has poured in from a variety of investors, including state-owned businesses, venture capital firms and A-list companies, boosting valuations and inspiring more investors to chase the bubble. 

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