Challenges before P2P lending industry

Although P2P lending industry is growing at breakneck pace, the total loan portfolio of P2P lending sector is still microscopic in the global scheme of things. It still has...

Snehal Fulzele 2nd January 2014

Although P2P lending industry is growing at breakneck pace, the total loan portfolio of P2P lending sector is still microscopic in the global scheme of things. It still has a long way to go. Investors may be coughing up cash at the moment, but as it continues to grow will there be an increasing demand for a stable business model, or more regulatory restrictions coming into picture? Of course yes. We have already seen a sneak-peak into the future of P2P lending with the JOBS act and similar regulations for P2P lending and crowd-funding in other countries across the globe. Let us take some time to evaluate the challenges before P2P lending industry: P2P lending

Default rates are flattering, but the timeframe is too short: P2P lending has seen default rates in the range of 2-3%, below the average of 3-4% in credit card industry (Source: Reuters). But one must also keep in mind the fact that P2P lending has only grown over the last 4-5 years. Is that timeframe enough to arrive at a conclusion, at least statistically?

Do the investors really understand the risks? : We all know P2P stands for peer-to-peer. But do these “peers” really understand the risks associated with lending their money to the borrower? The P2P lending companies or “platforms” as they call it, only “facilitate” the transaction. The entire risk of the loan is on the lender / investor. Given that most platforms don’t yet have a robust credit assessment procedures in place, is it a high-risk proposition for the “peer” putting his buck on another “peer”?

P2P lending’s reliance on IT: There are complicated algorithms and there are sophisticated systems at work. But given its growth rate, it may not be too late before these “platforms” begin to discover their limits. Can they achieve the amount of automation required to scale? Will the scaling-up process from 10,000 lenders to a million be smooth? The issue of P2P lending’s over reliance on IT in executing its business model makes these questions high-priority and in-fact existential.

unanswered questionsUnanswered questions around bankruptcy: Although the P2P lending “platform” only plays a facilitating role, isn’t it curious to know what happens in case it goes bankrupt? When you look more closely at the business model of P2P lending you will know that these platforms make money only after the loan is funded and the borrower starts repaying. So they will only survive if they make enough revenue out of collecting these fees than they spend on processing the loans. You will also discover that if the lending platform goes bankrupt, while institutional investors may eventual sail out, who would protect the interests of retail investors? So far the FDIC or SEC hasn’t commented on it.

As it is fairly clear from the arguments above, P2P lending is going to experience more scrutiny, regulations, questions raised around the business model as well as the role and accountability of the lending platforms themselves in funding a loan. But nevertheless it will be interesting to see how P2P lending industry sails through this storm. While the existing big players in the industry may already have plans to deal with these challenges, have the new businesses given a thought about this?



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