Peer-to-peer (P2P) lending is facing a transition in its adoption and growth conquest. It has passed the skeptic introduction phase and become a mainstream financial tool. P2P lending is typically used to offer government-supported loans, supporting small and mid-sized entrepreneurs, while dodging inflation on investment returns.
To understand how these benefits are possible you’ll first need to understand how P2P lending works. Essentially it can be broken down to technology that lets people acquire loans while eliminating the need for financial institutions to act as the middleman. It is a direct transaction between individuals which has sparked the usage of alternate terms “crowd lending” or “social lending”.
As you’ve likely guessed, this assumes a high level of risk, particularly for those investing in the lending site. This burden is typically taken on by the institutions but in peer-to-peer, it is now placed on the individual. So why would someone even consider putting themselves in that position?
The major incentive for going the P2P route is to avoid the high-interest rates that traditional institutions or investors would instill. In this case, small businesses can access loans while minimizing how much interest is taxed. Lending platforms then take a fee from investors and borrowers and that is how they make their money.
This begs the question, why would someone invest in a peer-to-peer lending site as opposed to a typical GIC? Well, most investors look to diversify their portfolio and avoid the marginal rate and withholding taxes found with banks. Additionally, some investors just like to know who their money is going to and what it’s being used for.
Security of investing in P2P sites
In the case of peer-to-peer lending, investors certainly bear more burden than the borrower. These loans aren’t insured nor do they have any government protection which makes them risky just like any other investment. However, here are some components that ensure some level of security for investors:
Secure Sockets Layer (SSL): This protocol is built to transmit communications between the user and the network securely. The SSL link will be encrypted between the server and the browser and only permit interaction once authentication is established. Instant messaging platform WhatsApp is an example of SSL encryption and authentication in action.
Protecting identities: SSL authenticates the server and the client in peer-to-peer platforms. Typically, SSL doesn’t operate on the client end but for these platforms, it’s just easier to have authentication be transparent. The encryption aspect is what locks down the data and privacy.
Recent FCA regulation: In the United Kingdom, the Financial Conduct Authority (FCA) implemented new guidelines to tighten up the peer-to-peer lending sector. These guidelines are designed to protect investors. Among many features, outlining contingencies and policies for both parties as well as determining the competencies of users are included. They highlight the situation investors are getting into very clearly and this is likely the beginning of a global trend for FinTech platform security measures.
Why are people choosing P2P?
As we’ve examined and outlined, borrowers have less pressure with these funds which offers them flexibility. Lenders can have more in their pocket post-return than they would be going through a bank that uses marginal rates determined by your tax bracket. Whereas peer-to-peer lending platforms charge a 2-3% payment processing fee directly from your credit or debit. However, depending on your individual financial history, poor credit ratings could mean more fees and in some cases, disapproval of the loan.
What’s in it for businesses?
Businesses need funding whether it’s to launch a campaign, bring on more staff, more resources, etc. The point is businesses take investments and re-invest them in themselves. Commonly this is done by bank loans to get off the ground but they often come with a lot of strings which is why a company would turn to a FinTech like P2P. Additionally, the loan can come quickly and you can pay them off early and even avoid penalties on an overpayment.
Is there a promising future for P2P?
Investments are at the forefront, a lot of people want flexibility and something that’s going to be beneficial in the long term rather than just make a quick return. In addition to this, there is an ever-growing number of startups that need funding to get over hurdles. Peer-to-peer is very with the times in its approach in that it offers what consumers are looking for. Flexibility, transparency, and saving costs, all of which will contribute to the sustainability of the service.
The performance of peer-to-peer lending has been phenomenal in terms of revenue, Canada alone has valued the market at $20 billion in 2021. Globally, it sits at almost $113 billion with projections to do well over $520 billion in the next 5 years. As a FinTech company, if you’re not looking into how you can deliver this service, there is a lot of cash you could be leaving on the table.
The Takeaway
FinTech services branch far beyond online banking, every service provider is looking for new methodologies to make it easier and more efficient for consumers. At the end of the day, ideas like peer-to-peer lending or BNPL are going to be the major draws to the business. When taking this journey, make sure you’re developing your programs with the right software as that can make or break your products' sustainability.
Written By Ben Brown
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