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Peer-to-Peer Lending, A Paradigm shift in Digital Lending Industry


Peer-to-peer lending is the practice of lending money to consumers through a technology-driven platform that matches lenders directly with borrowers. Peer-to-Peer is an alternative way for borrowers to borrow funds and for investors to expect returns.  P2P is a platform or marketplace where Borrowers are looking for credits and investors are looking for putting money to work, earn as well as taking credit risk on their own.

Borrowers having small to medium range of credit appetite are the main consumers. Investors can be any accredited or non-accredited individual.

Although it is not a very new concept, however, the global financial crisis during 2007-08 brought it into the spotlight while traditional financial institutions were hardening their rules and regulation for financing. After that Technological advancement and Digitalization elevated this lending model.

Rate of growth of P2P Market.

Increase in Digitalization and advancement in technology has driven P2P long way in 21st century. COVID situation in 2020 changed the lifestyle of people and moved every possible business operation to online. This could be a driver for P2P lending to gain more market in next few years. 

Why P2P lending?

Many times, Bank does not approve a loan (personal or commercial) because of many factors such as financial strength of the borrower, credit rating, initial deposit capacity. Borrowers overcome these barriers by incurring the loan on high interest. 

Borrowers do not get much choice in interest rate. In P2P platform the borrowers have more probability to get their loan approved as their loan request is visible to several investors. 

The individual risk appetite of the investors creates the opportunity of the borrower having low credit rating. It depends on how an investor wants to manage risk profile of own investment portfolio. Investor may always go by the good rated borrower for safe lending or approves an conditional offer for a low rated borrower.

Even though the borrowers get the loans at a much cheaper rate than banks, the investors still manage to get a higher rate of return compared to other investments in the market. 

This gap of rate of return forms the business driver for P2P lending.

Because of the online servicing, operational cost for loan origination is much less in P2P platform and faster processing..

‘Because of the online servicing, operational cost for loan origination is much less in P2P platform and faster processing’….

P2P Platform, a cost-effective model than Banks

P2P platform, a cost-effective model than Banks

P2P platforms are technology led lending platform. Unlike banks, it does not incur branch operating cost. It is a huge cost benefit for P2P platform.  It is an end-to-end online solution to automate borrower as well as Investor’s need. 

Risk Mitigation in P2P platforms

P2P platform, A Technologically advanced and transparent between parties (consumers and businesses) platform, do diversify risk by spreading investors’ money across loans.   

Platforms have backup funds in place which is created through a fee charged to borrowers.

Grouping of borrowers minimize the potential risk for the investors’ portfolio.

‘Open Banking’ , a Catalyst for P2P Lending

‘Open banking’ (OB) brings accessibility to full spectrum of customer financial data which can do risk analysis faster with more accuracy. By building a common set of standards for financial services on digital channels, banks and FinTech have come together to share inhouse data securely and use it for better outcome for individual and endless opportunities for businesses. 

‘Open Banking’ borrower credit history information check could be much easier , transparent and more accurate. There are multiple situations such as most of the times rental payments are not reported to credit bureaus, deferral of small loan from private investors. 

OB service in Borrow recognition. A transparent and wider background check through digital channel could be an extremely fast process for decision makers or investors.

Borrower’s source of income validation and insights of lifestyle analysis from OB service can forecast about the repayment nature of the borrower.

Enabling OB in P2P will be endless opportunity for business as well as individuals.  A faster platform with transparent and more accurate decision making will help to create tailored services for borrowers and investors. 

P2P can use the data to create possibilities for offering lower rate depending on borrower’s risk profile.

‘‘Open banking’ might bring more transparency in information availability for creditability of a borrower’….

 How the underwriting accuracy can be improved?
Underwriting depends on the P2P platform providers. Grading a borrower or raking a loan differs from platform to platform for their inhouse risk parameters. Platforms gets data from different credit unions.
However, Underwriting could be standardized if the source of data and assessment parameters are consistent. Government or a Central regulatory authority can enforce same data source and leverage open banking for decentralized data.
How the borrowers profiles are understood better with a better and fair credit rating?
Data from multiple credit unions provide the transparency of borrower’s profile and credit rating. However there are many circumstances where credit unions are generally not posted with every transaction such as rental income, personal debt from any small business, short term fund on any collateral.
Fraud Detection
Borrower’s identity verification and quick application processing could not be achieved without AI machine learning model for fraudulent applications. P2P is a complete online system. Digital copies for application supporting documents need real time verification.

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