What is crowdlending?

This blog is for informative purpose on FinTech technologies like crowdfunding, from which one specific branch is the crowdlending.

Peer-to-peer lending is an alternative to the traditional bank lending system. Traditionally, if a person wanted to take out a loan, they had to go to a bank or similar financial institution to apply for financing. Once the whole application had been put together with the help of an advisor, it was then necessary to wait for the bank’s decision whether or not to finance the loan. This decision was mainly based on the applicant’s ability to repay.

Now, thanks to P2P lending, it is possible for individuals to borrow directly from each other without the intermediation of banks via dedicated online platforms that directly associate lenders and borrowers.

Why is this so popular?

In our networked economy, it is now possible to run the world’s largest taxi service without owning a single taxi (Uber), to offer accommodation to travellers in a million rooms owned by others (Air BnB) and to broker billions of loans between those who want to lend and those who need to borrow (P2P Lending).

This form of so-called ‘social lending’ has been considered a major innovation in retail banking in the FinTech category for several years now. This is because now anyone who needs funds can turn to other individuals to borrow, bypassing any bank intermediation.

Thus, P2P lending promises higher returns for lenders as well as significantly lower interest rates for borrowers compared to traditional banking institutions. For investors, it provides a steady stream of income (interest and principal repaid each month).

Overall, the minimisation of barriers to both accessing and offering a loan, coupled with more attractive rates, has allowed this type of online financing to gain its current popularity.

How does it work?

Today, the whole range of P2P lending is managed through specialised online platforms that match lenders with borrowers according to their needs and demands.

Investors can browse other people’s loan applications and decide if they want to invest. Typically, investors put small amounts of money (from a few dozen to several thousand euros) into several different loans, allowing for good portfolio diversification. Thus, a loan is not based on a single borrower but on a multitude of small investors.

Borrowers then provide information on their personal and financial conditions, while lenders assess the risk themselves using decision criteria provided by the online platforms. Investors are free to decide on their criteria and the loans they wish to finance.

When did P2P lending start?

In 2005, the world’s first P2P lending platform, Zopa, was launched in the UK. In 2006, China opened the first P2P platform in Asia. Since then, more and more P2P lending platforms have been created.

Currently, the largest lending platform in the world is Lending Club, which has accumulated a total of about $4.6 billion in transactions. On this side of the Atlantic, it is Mintos.

In its early days, the P2P sector was considered a high-risk, high-reward investment vehicle by investors. Today, the government is providing more and better support policies to support the development of P2P lending.

Over the years, both the number of P2P lending platforms and the volume of transactions have steadily increased. Social lending is an institutionally permitted practice in most countries around the world, including Thailand where I live.

What benefits can be expected?

1More attractive rates than most other savings and investment options

2The ability to set our own interest rate that pays our lender

3Predictable returns on investment paid monthly

4Investments uncorrelated to the inherently volatile stock markets

5Buy-back guarantee against any possible default by the borrower

6Compound interest with automated reinvestment function

7Possibility of reselling loans to recover cash quickly

8Risk diversification through multiple small loans

9Ability to choose the type of loans and the sectors in which you invest

What risks are involved?

1P2P market liquidity is lower than stock markets

2Default risk of the loan originators with which the platforms work

3Regulated market but not as regulated as the banking market

4Risk of a platform collapsing

5Some platforms do not offer a secondary market for resale

Is P2P lending for me?

You might think that investing in P2P lending is only for those who are skilled enough to understand its complex mechanisms. The answer is no. All it takes is a little education in P2P rules to make the right investment choices.

So anyone who is sufficiently motivated and has a basic understanding of money management can start investing.

Before doing so, I strongly recommend defining your investment strategy and identifying the platforms that suit your profile. Indeed, not all platforms require the same technical knowledge. For some, no knowledge is necessary, for others a prior training will be necessary in order not to make investment mistakes.

Where do investors come from?

When asked about this, the Mintos platform said that there is no typical investor profile. On their platform, lenders come from all walks of life and the amounts invested range from a few hundred euros to millions of euros.

In the end, no matter how much you invest, everyone can get the same return on investment in terms of percentage.

You may also be under the false impression that only residents of certain countries are allowed to invest. This is far from the truth as you can invest worldwide, with only a few restrictions based on European Union regulations.

To give you an idea, the main countries where we see new investors joining P2P are the following: UK, US, Germany, Netherlands, France, Spain, Belgium and Malta.

What future for P2P lending?

In 2018, the global consumer lending market was valued at $15 billion. It is expected to grow at a CAGR (compound annual growth rate) of over 19% to exceed $44 billion by 2024 due to the ever-increasing number of borrowers.

This market growth is particularly important because of its mode of intermediation which minimises operational expenses such as staffing and maintenance costs, as well as physical branches unlike traditional banks. In addition, advances in technology and the low costs associated with operations are providing a huge boost to both supply and demand.

Regionally, North America represents the largest market for consumer lending. However, the Asia-Pacific consumer lending market is expected to grow at an extremely rapid pace in the coming years due to the presence of a massive student population in developing economies such as Japan and India and the increasing number of start-ups and businesses seeking funding for their projects.

How to get started?

In P2P lending, it is fairly simple to get started, but a little trickier to get it right. Access to the platforms is simply by registering and generally benefiting from bonuses if you are sponsored.

You still need to define your strategy beforehand, which means first of all considering the state of your resources, defining your expectations in terms of return on investment in the short, medium and long term, becoming familiar with the essential principles of P2P loan management, understanding the different criteria for selecting loans, and of course determining your level of involvement.

It is then, according to your strategy that you will determine on which platforms you wish to invest. To do this, I invite you to first read the in-depth analyses that I have done of certain platforms such as Mintos, Swaper and PeerBerry. But you can also expand your scope with the course comparing the 7 best European P2P platforms to date.

To deepen the subject, here is a non-exhaustive list of bibliographical references on the subject of P2P investments. You can see that the first studies date back to 2008. We are therefore in a mature sector.