In the wake of the 2008 financial crisis, banks started making consumer lending stricter. Cheap, quick loans became difficult to acquire. Some consumers found it difficult to get loans even though they had good credit history. The environment of scarce credit and lengthy approval process became an opportunity for the alternative finance market, resulting in the growth of the peer-to-peer (P2P) lending space.
P2P lending utilizes online platforms to connect investors and borrowers, solving the issue of costly and time-consuming credit approval. The business model offers a cheaper and more accessible alternative credit solution. P2P lending has grown worldwide, and has become one of the fastest growing areas of alternative finance. But will this growth continue in the future?
The Growth of P2P Lending
P2P lending connects individuals with surplus money to invest with those seeking a loan. Depending on the P2P lending platform, one can apply for personal loans or small business loans. Add technology and alternative data utilization to the mix and you have a powerful new credit solution.
What was once a form of alternative finance is now entering the mainstream. The P2P lending industry is transitioning from its startup phase into adolescence and is moving fast towards becoming a high growth, mature, and stable market, which will bring great benefits to consumers of financial services.
So far, the industry has grown up without any significant growing pains. Defaults have stabilized and the market has continued to grow.
Globally, the market has shown tremendous growth. While the P2P lending industry has not fully matured, the situation has created enormous investment opportunities worldwide due to lending gaps and borrowers’ increased interest in P2P lending services.
In different parts of the world, P2P lending is looked at differently. In Canada and the UK, for example, P2P platforms are regulated as an intermediary, while in Germany and France, regulators regard P2P lending as similar to banks. In the United States, regulations vary from state to state. India has a significant estimated worth of P2P lending volume in just two years while China’s P2P market has grown exponentially over the past few years. The above shows how far P2P lending has grown since 2005, when the first P2P platform began operating in the UK.
Challenges for the Industry
As good as the P2P lending market appears right now, there’s still a long journey ahead to tackle. The P2P lending market hasn’t yet reached its full potential. There are many out there who still aren’t comfortable enough with the relatively new business model to use its services.
Additionally, there are several factors that will determine the future growth of P2P lending. If interest rates rise, the number of loan defaults may also increase. Leading P2P lending platforms need to work around this or risk having the bubble pop. Either way, if the economy is overall doing well, the number of defaults would remain stable.
Another factor is competition from banks and other financial institutions. As P2P lending platforms gain mainstream attention, financial institutions have begun to take notice. However, many banks have chosen to partner with strong P2P players to widen their reach to the underserved segment at a lower cost.
So, will P2P lending continue to grow in the future? All signs point to “yes” – as any market experiences a transition to reach maturity, new risks will emerge. But so long as platforms continue to guard and innovate against such risks, the future of P2P lending is bright.
This article was written by Funding Societies, Singapore’s leading peer-to-peer (P2P) lending platform. They provide working capital loans for small and medium-sized enterprises (SMEs), along with attractive investment opportunities to the broader public. To learn more about them, visit their website here.