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How to Launch a Peer-to-Peer Lending Operation – 6 Critical Components

img_Turnkey-Lender_blog_How to Launch a Peer-to-Peer Lending Operation – 6 Critical Components

P2P lending isn’t a trend. It’s an entirely new delivery vehicle that’s here to stay. Borrowers have already pushed peer-to-peer loan volume close to the $1 trillion mark, but launching an infrastructure that supports investor/borrower matching can still be a complex undertaking. Alternative and digital lenders who understand online origination and payments processing are the ones to be well positioned to succeed.  

Unfortunately, it’s not as simple as opening an online store and waiting for borrowers to knock. But worry not. This article will discuss the opportunities as well as the requirements. And it will provide a 6-step plan for launching a peer2peer lending platform.

P2P lending growth potential

Peer-to-peer lending – also known as P2P, marketplace lending, and crowdfunding – was launched in 2005 when Zopa connected their first private investor with their first borrower. Over the past decade, we’ve seen explosive growth with more than $64 billion in loan originations. Lending Club was the clear leader with its $16 billion, which accounts for 25% of total market share. The future looks equally bright. Statista believes that P2P loan volume will top $1 trillion by 2025, and Allied Market Research projects a 51% compound annual growth rate (CAGR) between 2016 and 2022.

This incredible growth in P2P lending has been fueled by three major events:

  1. The 2008 financial meltdown brought loan approvals to a crawl, forcing borrowers to look for non-traditional financing options.
  2. That same meltdown caused many federal oversight committees to cut interest rates, forcing institutional investors like hedge funds and insurance companies to look for non-traditional investment options that generate higher yields.
  3. The fintech boom created a multitude of new digital and alternative lending options that compete effectively with big banks.

We believe there’s substantial opportunity for new players who want to get in on marketplace lending. Our position is based on the fact that the three underlying events that fueled the crowdfunding revolution are unchanged. Plus, borrower demand remains high for both personal and business loans.

The basics of P2P lending

It wasn’t so long ago that crowdfunding was considered a grassroots, counterculture movement. An online community where people could tap their social networks to raise funds for a worthy social cause or a new business venture. Today a large portion of marketplace lending is underwritten by hedge funds, insurance companies, and big banks.

Peer-to-peer loans are extremely attractive to both borrowers and investors, especially millennial and Gen Z prospects who were born in the digital age. It’s a perfect storm for everyone involved.

The delivery systems may be complex, but the idea is simple. Borrowers fill out an online application, and wait for lenders to bid on their loan. Lenders search for borrowers that meet their investment goals and risk tolerance. The early investors found the process to be a bit like shopping on Amazon or eBay, so they developed P2P decision software to automate the review process. It saved them substantial time and effort, and supported more profitable credit decisions. Today the larger marketplace lenders like Lending Club and Prosper Marketplace, as well as the leading LaaS providers like TurnKey Lender, include advanced investor software in their default platform functionality.   

P2P offers lenders a low risk, high reward investing instrument. The average ROI in 2018 on Lending Club was a healthy 6.39%. The average ROI in the first quarter of 2019 on Prosper was a stellar 10.78%. It’s easy to see how professional investors, using software with credit risk algorithms and automated portfolio management, can generate a 15% ROI.   

Launching a P2P lending operation

There are a number of good approaches that work well when launching a P2P lending operation. The best choice for your organization will depend on your unique business goals and objectives.  

A marketplace lending business model could be as simple as becoming a pure play investor. This is a scenario where an organization funds loans originated on an established P2P lending platform. Why not leverage another lender’s origination and account management machine? It’s also a great way to test the waters, and see another group’s inner workings before launching your own platform. Another business model could be as complex as partnering with a large private investment group and building a proprietary P2P lending platform from scratch.  

In the middle of the spectrum are digital and alternative lenders. They are well positioned to add P2P to their product line, by layering the extra functionality on top of their current infrastructure.

It’s important to consider at least six areas when developing your P2P deployment plan:  

  1. Evaluate your current assets, and determine your business model
  2. Decide on your value proposition and loan products
  3. Determine your credit scoring criteria
  4. Choose your technology platform
  5. Assess the regulatory compliance requirements
  6. Create a marketing plan that targets borrowers and investors

1. Evaluate your current assets, and determine your business model

Conduct a thorough analysis of your current lending operation. One of the best ways to control the risk associated with a major change is to leverage your existing foundation, test on a small scale, and then ramp up to full speed after fine-tuning the pilot program. Look at the people, operational processes, and technologies that could support a peer-to-peer launch. Map out your P2P requirements. And then determine the gaps between your current technologies, operational systems and loan products compared to a marketplace lending operation.

Based on the outcome of your analysis, you may decide to upgrade your lending platform, build a new platform, or leverage a fully managed LaaS platform.

2. Decide on your value proposition and loan products

It’s good to be customer-centric when you are developing a value proposition. What are consumers looking for in a marketplace loan? What can they get from your competition?

Map out the competitors on a market grid to see where they are clustered together, and where there may be empty patches that you could claim. What’s the best way to differentiate your brand and products compared to the competition? Most marketplace lenders promise an easier application process, faster approvals, and lower rates. In order to compete effectively, you must go beyond product features with a compelling brand personality and value proposition. Can your operation claim a unique selling proposition (USP)? Or is there an underserved target niche that you could own?

Use the competitive analysis as a springboard for brainstorming creative ways to differentiate your program, making it more attractive to the prospect audience. For example, RateSetter is an Australian lender that completely removes investor risk with a provision fund. Borrowers pay a small fee into the fund, and then these monies are used to reimburse investors in case of a default. This tactic allows them to claim truthfully that no investor has ever lost money on one of their loans. Another example is Lending Club. They appeal to consumers with high credit card debt by offering a consolidation loan that will improve your credit score.   

3. Determine your credit scoring criteria

The credit review process is a major component of your business model, because P2P prospects are looking for faster approvals and lower interest rates. Successful marketplace lenders use creative credit scoring techniques to qualify more borrowers without taking on undue risk. More borrowers can mean more investors, because the platform is presenting a wider range of investment opportunities. It’s all part of nurturing a community of long-term platform participants.

LaaS systems can be a good choice for lenders who prefer to buy rather than build. Top LaaS platforms include P2P lending modules with state-of-the-art credit scoring techniques. They integrate traditional credit bureau reports, alternative credit scores, and proprietary models supported by AI and machine learning.  


4. Choose your technology platform

P2P lending is complicated by the fact that you’re acting as a market maker by bringing together borrowers and investors. This intermediary aspect of the business requires specialized software that automates and optimizes the operation. P2P platforms must deliver all the origination and servicing requirements of a typical online lender. Then they must layer on additional processes that will monitor large numbers of small borrower payments, help lenders make faster and better investment decisions, track earned income back to individual investors, and process digital disbursements. All with the highest level of speed, accuracy, and cybersecurity.

P2P lenders can either build their own technology platform from scratch, buy existing software from a vendor, or subscribe to an LaaS program. These early technology decisions are crucial. They can significantly impact time-to-market, scalability, flexibility, and technology setup costs.

A proprietary platform can take 8-12 months to develop and deploy. It can be at least four times more expensive than a customized LaaS plan. And it will require a fully staffed IT department to maintain and upgrade features and functionality.   

An advanced LaaS platform will include these P2P features:   

The base platform functionality will include:

5. Assess the regulatory compliance requirements

Changes to the regulatory landscape are fast and furious with harsh penalties when you get it wrong. The compliance rules affecting marketplace lending tend to be ambiguous, so you may want to consider an outsourced regulatory compliance expert to consult on your launch strategy. You’ll want to choose one that specializes in marketplace lending in your geographic area.    

There are two unique aspects to marketplace lending that complicate the compliance process – different types of investors, and online operational systems. A P2P investor could be an individual or a big bank. When your marketplace lending platform becomes the origination vehicle for a big bank loan, then the platform may need to comply with big bank regulations. In addition, the program must comply with all Internet marketing rules as well as cybersecurity requirements.    

Start by determining which compliance rules apply to your business model, product line, and geographic area. In some countries, like the United States, there are multiple layers of regulations issued by different governing bodies at both the state and national levels. In other countries, there are almost no rules. In India, there have been no licensing requirements for P2P lenders. However, this situation may change based on new guidelines just published by the Reserve Bank of India (RBI). In Brazil, the Central Bank has announced its support for marketplace lending. And in Australia, marketplace lenders may be able to promote their products and services for 12 months with limited regulatory requirements under the Australian sandbox system.

China is another volatile geographic market. In 2015 they released new rules governing P2P loans after several marketplace lending scandals. These regulations protect investors from fraud, and dictate specific operational procedures. The compliance deadline was June of 2018. More than 300 lenders chose to close their doors rather than comply, which makes China a key area of opportunity as the dust settles.    

6. Create a marketing plan that targets borrowers and investors

Which comes first? Investors or borrowers? It’s one of those frustrating chicken-and-egg questions. The answer is neither and both. It’s neither, because you must start by building a positive brand presence to attract participants. And it’s both, because as a market maker you can’t close a deal without bringing two parties to the table.       

Some of the early P2P lenders spent substantial time and effort attracting investors. They believed that borrowers would arrive in droves as soon as they opened their online door. The reality was often the opposite. Attracting investors was easier than expected, but attracting borrowers was more difficult than expected.

Targeting investors

There are two types of investors: individual investors, and large institutions that want to leverage a P2P platform as an origination pipeline. Lending Club maintains a 25:75 split where 25% of loan volume is funded by big banks, and 75% of loan volume is funded by smaller individual investors. Segment the two groups, and create separate marketing strategies. Target big banks and institutional investors with a high touch campaign appropriate for a major account. Target individual investors with an automated campaign that delivers a large number of repeat touches cost efficiently.

The winning messaging is – earn higher investment returns without undue risk.

But, of course, only if you can deliver on such a promise.

Targeting borrowers

The typical borrower is a millennial or a younger Gen X, regardless of whether they’re looking for a personal loan or business funding. When marketing to millennials remember that they often look beyond product features to intangible factors like digital delivery, system reliability, brand integrity, and omni-channel customer service support. These prospects consume social media like coffee, especially online ratings-and-reviews. Be sure to include customer review strategies and tactics in the marketing plan when targeting these groups.   

The winning message is – easy online application, fast approval, and lower interest rates from a brand you feel good about.

Building your brand

Marketplace lenders must create and sustain a strong brand presence. Marketplace lending is still a new and volatile financial category, and a solid brand image will help you weather the inevitable storms and shake-ups. When the dust settles the strong brands will thrive, while many of the upstarts will fall to the wayside. It’s one of the reasons to include social proof tactics like online ratings-and-reviews as part of your overall marketing strategy.  

Next Steps

Is it time to stake your claim in the P2P lending arena? It’s a robust marketplace with new peer-to-peer lenders opening up shop on a weekly basis. Many are actually big banks acting behind the scenes, trying to recoup their losses now that borrowers are turning to alternative funders.

Savvy lenders will consider a fully managed LaaS software program to launch quickly, effectively and cost-efficiently. The TurnKey Lender platform delivers superior origination and account management as part of the base functionality. Our P2P module includes specialized features for borrower/investor matching, investor disbursements, and investor decision software. All with the highest level of accuracy and data security.

If you’re exploring opportunities in the P2P arena, then reach out to request a Free Trial.  

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