The Rise of Peer-to-Peer Lending: An Overview of the Market

Peer-to-peer (P2P) lending refers to direct lending between individuals and businesses without banks or other financial institutions through online lending platforms. It is an online financial arrangement involving online platforms that connect borrowers with investors or lenders who are willing to offer loans to eligible applicants. Some common types of loans include small business, consumer credit, real estate, and student loans. It eradicates the financial institutions as the middleman and enables investors to reciprocate higher returns on investments (ROI) by balancing the risk. It provides a convenient source of funding, allowing individuals to obtain business, personal, or educational loans at competitive interest rates with flexible repayment terms. It is quick, convenient, and easy to use, allowing P2P loans off early or overpayment without penalties. In addition, P2P lending facilitates several partner lending and borrowing, allowing for the diversification of investments and providing a hassle-free loan process with minimal documentation without affecting credit scores. Owing to these benefits, peer-to-peer lending is gaining immense traction among individuals, households, small and large businesses, and the real estate sector across the globe.

The global peer to peer lending market is primarily driven by the rising demand for lower interest rates among borrowers. In addition, the expanding small and medium-sized enterprises (SMEs) and the rising demand for an alternative financing option with low fees and convenient repayment options are contributing to the market growth. P2P lending platforms are cost-effective as they do not require maintenance, physical branches, or staff, making them a low-risk option for both borrowers and lenders. Moreover, numerous technological advancements, including the development of blockchain-based smart contracts, that provide reliable and transparent lending and borrowing facilities represent another major growth-inducing factor.

Besides this, various governments are taking the initiative to encourage P2P lending platforms by offering supportive regulatory policies, which provide a suitable framework and support the industry while protecting P2P lending providers from potential risks. For instance, the Government of France has created a website that offers a directory of prominent P2P lending projects, along with necessary industry activities and back-office assistance. Along with this, the shifting consumer preferences toward online loans due to their advantages, such as convenience and shorter processing times, are accelerating the product adoption rate.

Apart from this, the widespread product adoption in micro, small, and medium enterprises (MSME) to access financing for fixed investments, inventories, and working capital and minimize financial constraints is providing a positive thrust to the market growth. In line with this, the P2P lending market is growing at different rates in various regions. For example, North America is the largest market owing to the presence of big businesses and giant corporations in the region. Furthermore, the industry is fragmented and is expected to face extreme competition in the coming years as various key players are implementing competitive strategies to sustain their presence in the market. For instance, in March 2016, Prosper Marketplace launched its first mobile application by the name of Prosper Daily.

Moreover, Common Bond partnered with Macquarie Capital and Barclays and started offering loans to student borrowers and gain a competitive edge in the P2P lending market. Furthermore, in January 2022, LendWise launched an innovative finance ISA (IFISA) for investors with returns of up to 12 % with a minimum investment of EUR 1,000. The market is further propelled by the rapid digitization of the banking, financial services, and insurance (BFSI) industry, resulting in the transformation of financial services, including peer-to-peer or marketplace lending and mobile money. On account of these factors, the market is expected to witness a positive growth in the coming years.

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