History of P2P lending ⇒ When it started & how it evolved

Throughout history, innovation has changed the world and made things easier, smarter, and more assessable. Peer-to-peer lending is one of the innovations that has changed the ways the traditional banking system works. In some ways, you could say that P2P lending has changed history.

In this article, you can learn about the history of P2P lending; where it started, how it spread across the globe, and what the future might bring for this somewhat new innovation.

About Peer-to-Peer lending

Anyone who is an entrepreneur knows or imagines what it is like to use traditional bank loans to develop their own business. The amount ends up being increased by many interest rates. And in the end, it doesn’t always end up representing real gains. But new options are favoring companies that want to grow, such as peer-to-peer investment, or P2P lending.

Not much talked about yet, but gaining its space, P2P is a reality for several companies, startups, and fintech around the world. With Peer-to-Peer, individuals lend money to various types of businesses, or even people, receiving returns through interest charged to borrowers, which in turn are lower. This means that both sides stand to gain from this investment model. After all, investors make more satisfactory gains, while companies don’t have to deal with so many loan fees and bureaucracy.

Peer-to-Peer lending is a new financial product. Even so, the P2P lending practice itself has actually been running for a long time. Of course, traditional methods and not digital-based as it is today. In this post, we have prepared a detailed Peer-to-Peer lending history, which will make you understand how it all started.

Pre-history of P2P lending

Before talking about the P2P lending history, it is worth remembering how a bank works. On the one hand, we have investors who put their savings in the bank in exchange for a return, for example, the famous savings. On the other side, we have the borrowers who take money from the bank and repay it with the addition of an interest rate.

Simply put, the bank’s business model is to provide the lowest possible return for investors, and on the other hand, the highest interest rate for borrowers. So, the difference is the margin that remains for the bank. This profit margin is known worldwide as a bank spread.

The bank spread is the difference, in percentage points (pp), between the interest rate agreed on loans, and financing (investment rate), and the borrowing rate.

Bank Spread = Interest rate – Rate of return

In this context, P2P lending emerged as an alternative for both sides, not to depend on banks. For example, if John needs money, and at the same time, Carlos has money to invest, why not connect them directly and guarantee better rates than they would get at banks?

Therefore, thinking in a simple and collective way, P2P lending platforms are sites that connect people (or companies) who are looking for loans with investors looking for above-average returns.

As we started to explain to you, peer-to-peer is a form of investment that individuals can lend to businesses that are looking to develop. To do this, the investor accesses online platforms that do this type of operation. And so, he evaluates the conditions for the investment, and the rates to be negotiated, among other points.

It is worth remembering that, unlike other types of variable income, the investor does not become a shareholder, partner, or participant in the business in question. That is, he only lends funds to the company and receives the money back, plus interest.

Those interested in investing in this way must create an account on these platforms and analyze the profiles of the borrowers, the nature of the business, the type of risk, and rates, among other relevant points.

When did P2P lending start?

In the world, the history of P2P lending originated in the UK with the birth of a company called Zopa in February 2005. Reportedly, the company has made more than £1.5 billion in loans since then.

Several years later, in August 2010, the Funding Circle appeared, which also provided loans to small companies in the UK there. According to data, Funding Circle has disbursed loans to more than 90,000 small businesses. For your information, the two companies are members of the Peer 2 Peer Finance Association (P2PFA).

Despite being successful in providing very large loans, the P2P lending industry in the country, the capital city of London, has not always had such luck. In 2011, a company called Quakle had to close because of a failure rate of 100%. The reason is that the company measures various borrowers’ creditworthiness from the group’s score which leads to failure to repay.

P2P lending in the UK had the goal of competing with the banking industry, which at that time was reluctant to provide loans to small companies. Nevertheless, this action received harsh criticism from various parties, because it created unfair competition between P2P lending companies. In short, only the large P2P lending platforms have financial support.

Since 2014, the Financial Conduct Authority has officially regulated the P2P lending industry in the UK. Unfortunately, P2P lending does not meet the requirements for protection from the Financial Services Compensation Scheme (FSCS), which is specifically mandated to guarantee banks and their customers.

The rise of Peer-to-Peer lending

While P2P lending started in Europe in 2005, the world quickly caught on with this new innovation. Soon the idea of Peer-to-Peer lending was widely known across the globe.

P2P lending in America

Whereas in the UK, P2P lending was born in 2005, in the United States, the P2P lending industry emerged a year later, specifically in February 2006. The service provider company that first emerged was Prosper, followed by the Lending Club. Both companies are headquartered in San Francisco, California.

There are several reasons that make P2P lending a popular industry and that people in America are interested in it. First, the impact of the 2008 financial crisis, which resulted in the closure of new loan disbursements and the provision of interest rates close to 0% for depositors by banks. Second, restrictions are based on borrower eligibility and the imposition of very high borrower rate standards. Third, investors consider the loan period to be quite long, around three years, which they do not want.

In 2008, Prosper and Lending Club temporarily stopped the new loan process for borrowers. The reason is that their registration with the Securities and Exchange Commission (SEC) is having problems. At that time, Zopa chose to leave the American market. Sometime later, the two companies managed to get approval from the SEC to offer investors data on loan repayments.

Based on the number of loans that have been disbursed, Lending Club was claimed to be the largest P2P lending company in the US in 2012. The second place is occupied by Prosper. In total, the two companies have channeled funds of US $2 billion to more than 180,000 borrowers.

P2P lending in China

In the Asian region, to be precise in China, the P2P lending business model began to enter around 2007. However, the P2P lending practice there has actually been done by the community for a long time offline, even from centuries ago. However, it is in 2015 that online P2P lending in China grew rapidly. The number of lenders increased from 50 to nearly 3500. The amount of lending and borrowing activity at that time also reached 207 billion dollars.

This was due to the fact that traditional banking products are generally inaccessible to borrowers. Banks willingly issue loans to state corporations. This is because they understand that if something happens, the state will be responsible for them. But small and medium-sized businesses are often out of work.

Moreover, Only 320 million people have a credit history in China. This is about 20% of the population. Therefore, for the average Chinese, getting a loan from a Chinese bank is an almost impossible task. And the emergence of P2P lending provided new investment opportunities for people. It allowed those who could not get loans from banks to get financing. The growth of the credit supply stimulated business activity and consumption, which was so lacking to transform the economic growth model. Therefore, P2P removed the burden from the Chinese banking system.

However, between 2017 and 2018, defaults on P2P platforms took place. Unfortunately, since P2P are not banks, they did not have reserves. This is how the massive bankruptcies of P2P companies began. And very quickly, this wave swept over the rest of China. The situation was further complicated by the downturn in the stock market, where many P2P platforms were investing money from investors.

The most controversial case is the Ezubao platform, which turned out to be an ordinary pyramid scheme. The company stole $9.14 billion from 900,000 investors. From that moment on, the financial authorities of China began to look more closely at the P2P market. And it turned out that in China, it is not at all like the classic P2P market in other countries. It became clear that the industry needed to be regulated somehow.

With new tough measures to curb the booming sector, P2P companies were required to involve a financial intermediary, among other regulations. The involvement of a financial intermediary in the person of a depositary bank increases transaction costs, which also affects the profitability of the p2p business. Many P2P companies indicated that the requirements and procedures for obtaining licenses were unclear. Therefore, it was simply unprofitable for p2p companies to work, thus ending their activities.

P2P lending in Europe

P2P lending has also seen an uprise in Europe. Over the past decade, 100’s of new platforms have launched.

Here are some reviews of the most popular platforms in Europe:

Some of the platforms can also be used by international investors.

P2P lending in several other countries

Peer-to-peer (P2P) loans are on the rise and have already established themselves as one of the preferred options for companies and investors in other countries. Apart from the UK, America, and China, the P2P lending business model has also expanded to Australia (2012), New Zealand (2014), India (2012), Canada (2015), and so on.

Worldwide, this type of loan is gaining more and more space, and growth has been exponential. According to a report by the Global Alternative Finance Market Benchmarking, the growth of Peer-to-Peer lending across the continent has been exponential. The data suggests that between 2017 and 2018, Africa had a growth of 102%, the Middle East had a growth of 131%, Latin America had a growth of 173%, and South East Asia had an astounding 574%

The future of P2P lending

For many, these alternative financing platforms are shaping up to be the future of banking. People who are born today will not have a bank account in the same way that you do.

Initially, P2P platforms attracted more retail investors, but more and more large institutions have become interested in this system. Today, almost 50% of P2P loans worldwide are funded by institutional investors such as banks, trusts, pension funds, investment dealers, brokerage firms, or insurance companies.

Today, the sector is diversifying with different P2P business models already in existence. Also, there are a number of P2P platforms that have specialized in certain types of loans, such as property lending, balance sheet business lending, and invoice trading, and so on.

Some peer-to-peer lending companies are using algorithms to obtain the calculation of the amount with personalized conditions. The calculations are based on information for each applicant based on their credit history and proof of income. This represents a great advantage since investors can compare and choose to whom to lend their money. In the long term, the prospects for personal loans between people are expected to be favorable.

By acting as both lenders and borrowers, better rates and interests are offered for both parties, without the burden of strict regulatory barriers or other impediments other than the agreement between the lender and the borrower. And today, peer-to-peer platforms are the best way to get credit to small and medium-sized businesses. This means that in the future, P2P is going to transform the world of banking.

Conclusion

Created in 2005 in the United Kingdom, P2P lending was set to bring together people who wish to invest money with possible borrowers. However, many countries started embracing this new way of acquiring a loan.

With improved technology, digital platforms play the role of intermediaries, assisting in the correspondence between the two parties and in the transfer of money between them. In other words, these digital platforms function as financial institutions that capture and offer resources to individuals or companies without the participation of conventional banks.

This makes P2P attractive both to the borrower, who obtains lower interest rates than in the market and with less bureaucracy. And to the investors, who obtain returns greater than many fixed income products available on the market.