By Novum Capital
Traditionally, individuals and small businesses who want a loan usually apply through the bank. And those who want to avoid being charged high interest rates and lengthy process or that would otherwise be rejected due to poor credit history and less or no collateral, may opt for an alternative way of borrowing funds — peer-to-peer (P2P) lending. P2P lending is the method of lending money to individuals or businesses through online platforms that match creditors with debtors without the use of intermediaries. This has eased the lending process and given individuals and businesses a more convenient funding methods.
The P2P market outlook
The global peer-to-peer lending market is anticipated to witness a significant growth. A recent report by Transparency Market Research (TMR) estimated the market to exhibit a CAGR of 48.2% during the period of 2016 to 2024 before reaching a valuation of approximately US$897.85 billion by 2024. The report also showed that the volume of global P2P payments and remittances is eclipsing $1 trillion yearly, with annual growth rates in P2P lending volumes reaching 50% — 80% in various markets during the past few years.
Recently, a report by Cambridge University in collaboration with KPMGplaced P2P consumer lending at about $366 million recorded in Europe in 2015, making it the largest market segment of alternative finance. At the same time, P2P business lending is ranked second in the same segment with about $213 million. In 2015, the total online alternative finance volume for Asia-Pacific region was EUR 94.61 billion meanwhile the figures for the Americas and Europe were significantly lower at EUR 88.58 billion and EUR 5.43 billion, respectively. When considering the global landscape of alternative finance market, it is crucial to mention the market leaders in each region are China, the US and the UK, respectively, whom contributed significantly to the total volume of the region mentioned above.
Particularly, China’s P2P lending market is the largest and most dynamic in the world with the P2P outstanding loans reaching nearly RMB1.3 trillion in the 2014–17 period and more than 4,000 providers operating in the market today. Besides, there can be strong growth opportunities in developing nations of India owing to their gigantic population base as well as increasing number of potential borrowers with various personal purposes. With a rising number of loan applications on P2P lending platform in the years to come, it will make Asia Pacific become a market full of lucrative opportunities.
Problem: Rise in fraudulent activities and platforms
Despite the fact that funding opportunities that the P2P lending market opens up may attract an enormous number of users, there may be a few factors restraining the overall growth of the market.
Since P2P lending is a form of crowdfunding that offers personal unsecured loans to individuals and small businesses, one of the most challenging problems facing the market now is the fraudulent activities from players in the market. It can be the loan repayment default that happens with borrowers “running away” when they have to pay back the money to lenders, turning those loans into bad debts. In other cases, it was recorded that various platforms have been found to be straight-out scams after collapse, while owing millions of investors. Fraudulent activities will result in a loss of lenders’ confidence and trust. Consequently, this will further hamper the P2P lending market in the long run.
This is not only a prediction for the future but a fact that that we are witnessing in China — the world’s largest P2P lending market. Over the past years, a wave of defaults has swept across the industry, causing investors to withdraw funds and leading platforms to collapse. According to Chinese Banking Regulatory Commission, in June 2016, there were 1,778 out of the 4,127 P2P lending platforms suffering from default-related problems. Regarding frauds, Ezubao, once the biggest player in China, was found to be a Ponzi scheme that scammed 50 billion yuan (US$7.6 billion) from about 900,000 investors. In July 2018, at least 165 P2P platforms facing difficulties in meeting cash-withdrawal demands, as their owners abscond with investor funds, or were investigated by police.
Rising growth opportunities outweigh challenges
As an unsecured loans method, it is inevitable that P2P platforms might continue to face challenges such as the risks of payment defaults, frauds, or borrowers turning to banks. However, the growth prospects of this segment remain strong, being determined by factors such as the rise in interest rates, competition from banks, and the consumer market size. More importantly, these challenges trigger demands for transparent P2P platforms that can overcome the failures of the market while offering great opportunities for both creditors and debtors as an alternative finance method. In this case, blockchain-based platform for P2P lending is a promising solution for the future.
Enabling the growing P2P market
While P2P lending has revolutionised the way people borrow and invest money, the burst of blockchain technology has changed the way fintech industry operated. Blockchain may be the answer to a very old and aching question — “how can we trust what happens online?”
Using digital assets, such as bitcoin, for collateral and Ethereum smart contracts for transparency, blockchain-enabled P2P platform can minimize cost, create systemic trust and leverage the explosive social momentum driving cryptocurrency. It can also remove the geographical barriers for both investors and borrowers in financing, thus, bringing about an opportunity to diversify investment portfolios across global markets without high transaction fees. Additionally, one of the most significant advantages provided by crypto-based lending is loan tokenization. Using blockchain would make loan tokenization possible, enabling investors to easily trade their loans with other P2P network participants and improve the market’s liquidity.
In other words, it is now believed that blockchain technology holds the key to the future of P2P lending market.