The Role of Peer-to-Peer Lending in Fintech

Investment is the core of any banking institution. While the majority of the population relies on the bank for either taking loans or indulging in investment, peer-to-peer (P2P) lending is gaining popularity across the globe. This article elaborates on the role played by P2P lending in fintech. 

Table of Contents:

• • What is Peer-to-Peer Lending (P2P)?
  • The Role of Peer-to-Peer Lending in Fintech
  • The Future of Peer-to-Peer Lending

What Is Peer-to-Peer Lending (P2P)?

Peer-to-peer lending refers to the practice of lending money directly to individuals or businesses without an official financial institution participating as an intermediary in the deal. Intermediary platforms or companies are online investment platforms that match lenders and borrowers. They offer identity verification, proprietary credit models, loan approval, loan servicing, and legal and compliance services. 

Intermediary platforms serve as an alternative for a borrower as loans can be applied online and in a timely manner. The whole process can be as quick as a few days with correct information in place. It can also be attractive from a lender’s perspective because service and overhead fees are reduced by cutting out the middleman or the bank. This, in turn, improves the economics of the loan.

Peer-to-peer lending has become a major player in the fintech industry. Today, there are plenty of companies that lend to individuals and businesses directly in the U.S. Some of these companies include SoFi, LendingTree, Prosper, Lending Club, and Upstart. These companies offer loans for debt consolidation, small businesses, student loans, bad debt, mortgages, green loans, and major expenses. In an ideal scenario, their annual percentage rates (APRs) range from 5-35%, with loan terms of around 1 to 5 years. Also, the maximum loan amounts generally offered range from $30,000 to $100,000Opens a new window . 

There are multiple places for small businesses and individuals to borrow loans from, yet P2P lending presents the most seamless process to apply and borrow.

The Role of Peer-to-Peer Lending in Fintech

Currently, P2P lending is in its growing phase and has introduced a new set of investment opportunities for all stakeholders in the fintech industry. The next-gen investors are now shifting from traditional means to explicit P2P lending apps for processing loans.

According to a recent research reportOpens a new window , the global peer-to-peer (P2P) lending market generated $67.9 billion in 2019 and is expected to reach $558.9 billion by 2027, registering a CAGR of 29.7% from 2020 to 2027. Traditional banking systems have employed technological advancements to improve transparency and low operating cost and risk. This drive has led to the growth of the global peer-to-peer (P2P) lending market. However, low awareness about the P2P lending benefits and strict government regulations have hindered its market growth.

Now let’s understand the role of P2P lending in fintech.

P2P favors fintech innovation

Peer-to-peer lending has multifaceted future prospects. It presents plenty of benefits that can encourage a business enthusiast to try their hands on the process.

1. Offers greater returns

For decades, people have looked up to banks to provide loans. However, the interest rates of banks are undoubtedly high. This makes borrowing loans a sensitive aspect for large masses. On the contrary, the borrowers and investors can derive benefits from P2P lending. The borrower benefits from paying a lower interest rate, while investors can charge more than what they are paid by bank investment.

2. Eases the process of application

Traditional banking systems have their standards and policies in place while providing loans to customers. The customer is overburdened with paperwork and frequent visits to the bank before granting a loan. On the other hand, P2P lending platforms provide portals that streamline the entire process with e-applications. A borrower only needs to create their profile on the platform and request a loan by specifying the interest rate at which he expects to repay the amount. Once the profile and loan confidentialities are fulfilled, the borrower can explore a list of lenders and connect with the ones that appear feasible.

3. Quick funding process

Banks invest considerable time in customer scrutiny intending a loan. It takes nearly weeks to months before they agree on sanctioning the loan amount. On the contrary, the P2P lending facility is accessible via lending apps that automate the entire lending process and provide access to funds within a week. Besides, the customer can request an amount as low as $1,000Opens a new window (or even less), contributing to greater traffic over the app. Apps witness massive participation due to such facilities. 

Learn More: How Will 2021 Revolutionize Digital Lending

Risks of Peer-to-Peer Lending

There is no doubt that many individuals and companies favor investing in P2P lending. However, others are concerned about security and the prevalence of greater risk. The P2P lending market is filled with uncertainty. And this is its major drawback. It has been observed that although borrowers need to have a credit score before listing loans, very few prefer lesser return but secured investment means. Genuine borrowers benefit from the disadvantage, but it declines the overall trust entrepreneurs have in fintech investment.

Scope of Peer-to-Peer Lending

The prospects of fintech innovation are extremely high as the industry’s size continues to grow, owing to its penetration across all sectors. The financial world has been transformed with fintech innovation. Industries such as RegTech, InsurTech, and WealthTech are already impacted heavily by its storm. And the growing trend of this technology does not seem to fade anytime soon. 

P2P lending has played a crucial role in transforming financial services as it has revolutionized the entire fintech industry. Besides, it has provided opportunities to all start-up and business enthusiasts to opt-in for P2P lending apps to kick start their business.

Learn More: Where Is Insurtech Headed in 2021?

The Future of Peer-to-Peer Lending

Market disruptors can collaborate with the current market leaders to seize the market share and, in turn, shape new markets. With collaboration, each platform or company can contribute its strengths to developing financial services, including P2P lending. Hence, partnerships will play a critical role in the future of P2P lending.

Consider, for example, a peer-to-peer firm that offers efficient, seamless technological integration. Another financial services provider offers greater reach with a larger customer base. Now, with a mutually beneficial collaborative partnership, both the companies can be equally benefited. Hence, those who work towards building successful partnerships will be placed well to incorporate the rapid advances of AI into their processes and products. Such ventures will eventually steal the P2P market.

Today, one of the biggest challenges the fintech sector faces is raising awareness and benefits of the products they offer. Though P2P may seem like an established paradigm, the average consumer might still have not heard of it. Overcoming this hurdle will play a pivotal role in unlocking greater levels of growth for P2P lending.

As 2021 sets in, consumers and businesses will continue to search for better and optimal ways to obtain credit. Investors, too, are seeking to strike a balance between the volatility of stocks and shares and the poor returns on savings products. The convergence of these trends may just be the right recipe for peer-to-peer lending to take off. 

However, contributing platforms need to stay true to their principles of being fair to the customer all along the way. With all these ingredients put together, the P2P sector will become the ultimate powerhouse of the fintech sector in the years to come.

In conclusion

Given the rise of the P2P market and substantial investment in fintech innovation, it is imperative to keep an eye on what the financial services industry has in store. It will also be interesting to see how P2P helps redefine not just the fintech sector but the entire industrial world.

Do you think P2P lending will replace traditional bank loans for small businesses and individuals? Comment below or let us know on LinkedInOpens a new window , TwitterOpens a new window , or FacebookOpens a new window . We’d love to hear from you!