The attractiveness of Peer-to-Peer (P2P) lending is obvious to many in a world where banks and financial institutions have proven themselves overconfident and bureaucratic.
The rise of P2P is a direct result of this wave of distrust in conjunction with increased connections between people through technology and globalization.
Read this article before diving in here to see how P2P potentially could overthrow the big banks and the financial establishment.
Without a doubt, P2P in its essence has been successful, and it is changing the way that many industries do business. The success of companies like Uber and Spotify is firmly acknowledged in the mainstream.
These companies, however, have also faced unprecedented backlash from the establishment.
Spotify has been accused of lowering the value of music and not supporting artists. Taylor Swift (as much a part of the establishment as you can find) pulled her music entirely from the service in protest.
All this is normal for a disruption to industry however. With change, there will be people who resist it in order to maintain their share of the market.
The success of companies such as Uber and Spotify, shows how much people prefer them to the old ways of doing things.
But Why Not Lending?
The thing about the government is that they take the financial markets very seriously, and despite the blow that fell upon them from the Global Financial Crisis, Retail Banks still remain in the driver’s seat.
Peer-to-Peer lending at the moment has yet to strike any major blows upon the banking sector. Their share of the market is in the billions of dollars, but the Big Banks still deal in trillions.
The approach behind many peer-to-peer lenders is to bank the unbanked. These are people who are typically too poor to have any reason for a bank account, let alone other banking services. With peer-to-peer payments such as Paypal and Apple Pay, there are more and more easy and free ways to send money virtually.
P2P lending services also tend to focus more on small businesses and higher-risk borrowers than the established banks target. This means that they are not really taking business away from the banks.
It also means that they are not really competing with the established financial institutions. But will they get there?
A company called Lending Club launched in 2006. Their mantra was to “disrupt” the banking industry by giving individuals independence to navigating loans own their own withing a trading platform.
This company, for a while, drew a lot of attention and attracted a lot of investors looking for alternative investments with a higher returns than what bonds were paying (for example).
In its eagerness to grow, which is only inevitable in an emerging industry, Lending Club expanded to include more institutional investors such as hedge funds to mingle with the individual borrowers and lenders.
That shift has brought new scrutiny to the industry, and some foresee a time when these loans are broken up and turned into securities, hedged, traded on secondary markets,, and tracked by exchange-traded funds.
The Free Market Model
Imagine a world where you have a virtual wallet (accessed by smartphone) and have direct access to a marketplace that includes investors and lenders alike, all competing for your attention.
Lenders will compete directly with one another to lend at the lowest rate.
Everything and anything could be placed on offer in this marketplace. Cars and homes could be bought, sold, or rented by the owner, meaning that underutilized resources could be capitalized upon much more easily.
Many things like this already exist. Turo for example lets you rent other people’s cars on a daily basis.
The challenge that this model faces is the potential for disorganized and incomplete information. If everything is decentralized and independent, someone will come along with a service to organize it in a better way.
People will be willing to pay for this organization and capitalism will prevail in creating a new establishment. After all, banks are just people who have a good track record of organizing money, and most people are willing to pay something for it.
P2P lending firms are precisely this. They aim to organize people and information toward a common goal.
Peer-to-Peer lenders like to imagine a market of lenders and borrowers that exist in the Free Market Model, where banks and the government have no or little control over how people use their money.
They also, being the entrepreneurs that they are, see that there is a demand for organization in this
The popularity of P2P will be its inevitable downfall as more and more big investors are drawn into the game.
Their involvement cuts out the small-time players that P2P was originally designed for, and goes against the ethos of decentralization and independent. Not to mention the watchful eye of the government ready to smack regulations on it.
So, P2P lending seems to be working for some people now, but it is hard to see a sustainable model in the long-run.
For a well balanced review of the outlines some of the practical difficulties of P2P lending, check out Tim Bennett’s video below.