Is P2P lending just another passing trend?

Imagine filling out a brief online application for a loan and learning that your loan has been authorised for funding a few hours later. This experience is a reality thanks to various lending marketplaces which provide online platforms that connect borrowers and lenders (investors). The peer-to-peer (P2P) or marketplace lending model is increasingly well-liked among borrowers due to its simple application process and prompt lending approvals. Mortgages and other secured loans are among new product categories being developed in P2P lending.

P2P platforms appear to have carved out a market by offering borrowers a better loan experience, swiftly gaining traction. Without the involvement of any financial institutions, P2P lending is a unique approach in which investors and borrowers interact with one another and provide loans. This strategy makes the entire process simpler for all stakeholders.?Moving to high-tech online P2P lending firms reduces labour and infrastructure costs. Then, borrowers and investors might receive more enticing interest rates. Since the P2P platform itself does not accept deposits, expenses related to accumulating reserves can be avoided.

Bankers’ loss, P2P’s gain

After the financial crisis of 2008, banks implemented more stringent lending standards. Around the world, loan approvals may take more time and require more complexity. Such changes served to enhance the market share of P2P lending, strengthened its competitive position, and created new prospects.

In the financial sector, artificial intelligence (AI) is being used more and more. Credit risk is often?assessed using AI in P2P lending. The data provided by the borrower and the borrower and lender’s prior financial histories may be used to conduct this analysis.

Linking lenders and borrowers

While all P2P lending platforms use similar diversification strategies, the ways in which they use technology to link lenders and borrowers may vary.

One method is to use an online auction, in which borrowers specify the maximum interest rate they are ready to pay on their loans, and lenders specify the minimum rate they seek for specific risk categories. New borrowers are paired with bidders looking to issue loans on the site as they join the platform. The platform then performs an automatic ‘reverse auction’, gradually increasing the loan’s interest rate until enough bids are received to fund the debt entirely. The loan is provided at this interest rate as long as it is below the maximum rate the borrower is willing to pay. Otherwise, the loan application is rejected.

Another option is automatically matching borrowers and lenders at declared market interest rates determined by the platform for each risk category. Since there are imbalances between the numbers of lenders and borrowers, delays in matching can occur, but the platform may alter interest rates over time to alleviate these imbalances.

This opinion piece by our analysts is part of the September edition of the IBSi FinTech Journal. Subscribe to read the full article.