Peer-to-peer lending is primed for significant growth, fueled by lower operational costs for lenders and broader availability for borrowers in a period of market disruption and innovation linked, in part, to the coronavirus pandemic.
As an industry, P2P lending is a product of the internet age. It involves extending credit, principally via online services that match lenders and borrowers. With lower overhead costs, P2P lenders can achieve higher returns by lending money at lower rates than brick-and-mortar competitors — and some charge an additional “matchmaking” fee.
The worldwide market for P2P lending, estimated at $120 billion this year, is expected to hit $1.4 trillion by 2027. This updated estimate by research firm JCMR takes account of the pandemic and its economic effects as currently understood.
Markets, drivers, and downturns
By top geographic market, JCMR sees the US, China, Canada and Japan (tied), Germany, Europe ex-Germany, and Asia-Pacific as the most active regions for P2P lending through 2026.
By market segment, the research and consulting firm expects consumer credit, small business, and student loans to make up the lion’s share of P2P lending in the same period.
Catalysts for projected growth in the P2P lending space through 2026 include:
- Increased accessibility and public awareness
- New and more efficient lending technology
- Economic upheaval linked to the spread and persistence of the pandemic
Recent history sheds light on the last point — that periods of economic turmoil function as triggers for innovative lending — as a trigger for expansion, according to Elena Ionenko, co-founder of lending-software maker TurnKey Lender.
“The first US P2P-lending marketplace was founded in 2005, but the segment really took flight during the subprime-mortgage crisis of 2008,” says Ionenko. “In that period of contraction and retrenchment, 645 US banks collapsed despite a $431 billion infusion from the US government to help financial institutions offload ‘toxic’ assets. P2P lenders stepped in where traditional lenders hesitated to make loans to small businesses and consumers, partly due to then-new balance-sheet requirements for banks.”
Better inputs mean better results
Another advantage P2P lenders enjoy is the freedom and flexibility to assess “borrowers of lower quality” using non-standard or “soft” sources of information — especially when these inputs, including permission-based information that sheds light on spending and social-media habits, have been shown to result in loan portfolios that perform better than lenders that make credit decisions based on traditional scoring alone.
One study even suggests that innovations in fintech can smooth out credit market imperfections for P2P lenders by, in one assessment, “relieving information frictions for consumers and generating information spillovers to traditional credit intermediaries such as banks.” The original study shows that traditional lenders will provide more credit to households with low traditional credit scores that have previously obtained P2P loans — not because banks are responding to competition, but because of an “information spillover effect.”
While much of P2P lending is facilitated by platforms such as Prosper.com and Lending Club, some with basic origination and decisioning functionality, lenders with end-to-end loan-management infrastructure are better positioned to use these and other resources to build robust and adequately risk-managed portfolios.
Further, for embedded and non-bank lenders especially, recent advances in automation can make a P2P program a revenue adjunct to other in-house lending initiatives, and a hedge against risk in other in-house lending businesses. Some lenders even use third-party lending software to run syndication programs to share risks and rewards with secondary lenders.
P2P borrowing makes sense for consumers
For borrowers, using lenders that employ cutting-edge third-party P2P lending software confers four principal benefits.
- Faster approvals. P2P lending lives online, so it confers an immediate competitive advantage over traditional lenders when it comes to speed. What used to take weeks or days now takes about five minutes thanks to advanced automation solutions.
- Lower origination fees. Depending on the lender, origination fees could cost the borrower anywhere from 0.5% to 5.0% of the loan. But lenders backed by industry-standard software, the cost of artificial-intelligence-powered origination have lower overhead costs, which they can in turn pass on to their customers.
- A shot at a better interest rate. P2P lenders aren’t as heavily regulated and don’t have to fund branch networks compared with traditional lenders. As a result — and as a vital competitive advantage — they typically levy lower pay-back fees.
- Initial quotes that don’t impair credit scores. Lenders only do a basic search of the borrower’s data, letting the borrower continue hunting for better offers with their original scores intact.
Intelligent Peer-to-Peer Lending Made Simple by TurnKey Lender
TurnKey Lender has been pioneering the digitalization of peer-to-peer lending ever since the initial launch of the P2P module in 2017. Ever since, the company has been continuously improving and updating the solution to set, meet, and exceed the highest industry standards in terms of security, decision quality, speed, and user-friendliness.
As we’ve shown above, the global trend toward the elimination of the middlemen and direct cooperation between individuals was bound to overtake lending at some point. And TurnKey Lender’s Unified Lending Management solution that comes with pre-configured peer-to-peer functionality, makes it possible for any type of lender, traditional, alternative, business, consumer, or retail to provide their borrowers and investors with intuitive web portals where they can easily get financing and invest in loans based on their own selected risk criteria and financing capabilities.
Peer-to-peer functionality in TurnKey Lender allows users to invest in personal and business loans right from their personal investor portal within the System dashboard. The investors are registered as a specific user type – Investor. they can see the list of investment opportunities, invest online, and monitor the returns received.
As a lender, you’re able to allow the borrowers and investors to cooperate directly through you without any manual involvement from you or your staff. This reduces the working capital required to run a business and attracts more users thanks to the freedom and the added convenience of a modern integrated solution.
All of the functionality is realized in the single system which can be deployed and fully functional within days or weeks (depending on the configuration needs) where it takes other providers up to a year.
Benefits of TurnKey Lender for Peer-to-Peer Lending
- Investor portal – This is a separate workplace every investor automatically gets in your lending portal. TurnKey Lender engineers and business analysts made sure that Investor Portal has all the functionality an investor would need to analyze, select, finance, track progress, and collect funds on the loans they partly or fully financed. As an investor, you can co-finace a loan with someone, specify the risk levels you tolerate, and even set financing to automatic based on your personal criteria.
The system shows investors the risk details, payment schedules, potential returns, funding strategies, target industries, geographies, loan types, and more. Investors can also rely on dashboards and built-in reporting to analyze the performance of their portfolio and adjust their strategy. With this module, you instantly become a full-fledged online peer-to-peer lender, standing out among competitors in terms of decisions’ quality, speed, and accuracy.
- User experience – what may be even more important to the end-users, the system is well-designed and thought-through, providing borrowers, investors, and your staff with stress-free funding and borrowing experience.
- Thanks to advanced API Client functionality, your lending portal becomes an aggregator of various services that other lenders simply can’t provide or at the very least, will struggle to make as user-friendly as you do with TurnKey Lender. Disbursement, tracking, payments, collection, reporting, compliance, decisioning – all of that and more is robustly put together under one hood to allow for truly turn-key peer-to-peer lending.
- Intelligent risk management – as any other TurnKey Lender product, the risk scoring and credit decisioning for the P2P investors are based on the proprietary machine learning algorithms and deep neural networks applied to sophisticated scoring models. The system learns about your investment patterns and the borrowers over time and helps you make more accurate credit decisions in a matter of seconds. Enormous amounts of alternative and traditional credit scoring data are processed by the intelligent software to provide lenders with a deep insight into the likelihood of repayment and the optimal loan terms for each particular borrower.
- Scalability and flexibility – TurnKey Lender is frequently independently tested and according to the latest audits easily processes as many as 450+ loan applications per second without any losses in terms of decision accuracy and speed. At the same time, the scalable infrastructure is built to be adjusted to the very specific and unique needs of each jurisdiction and business type. So you will be able to put together exactly the credit products and business logic you need in a matter of minutes, without any involvement from the TurnKey Lender team.
Final thoughts
“The growth we see in store for P2P lending certainly has the potential to be augmented by economic disruption tied to the coronavirus,” says TurnKey Lender’s Ionenko. “But other drivers, like technology, consumer awareness, and the inherent value it provides consumers, are just as important.”
Peer-to-peer lending is on the fast-track to becoming one of the key digital trends of the post-corona economy. The lenders who make accessible, fair, quick, and user-friendly credit available to the masses – winns. Schedule a free personalized demo today and use TurnKey Lender to provide borrowers and investors with the digital experience they’ve come to expect in 2020.