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P2P lending: myths or reality?

Today, the interest of investors and borrowers in P2P segment is growing. However, both parties are cautious about popular beliefs related to alternative lending that may make them miss the opportunity to take advantage of it. What “myths” exist around P2P and how justified are they?

Non-guaranteed income

The principle “the higher the income, the higher the risks” usually implies no guarantees for the final result. So, investors prepare for the worst, investing under the best conditions. Attracting investors with high interest rates, a P2P platform may turn out to be a Ponzi scheme, as it happened with the Chinese platform Ezubao, which took away $ 7.6 billion in 2015.

But such cases are not a common trend for P2P market. By 2017, the share of Chinese alternative financial industry reached 99% of the total market in APAC. This was followed by the introduction of regulatory norms later in 2018, which reduced the number of unreliable platforms. The world practice of shifting all risks to investors will definitely give way to advanced approaches.

These include, for example, insurance for P2P investments, which is common in Spain. Investment packaging is also widely used today. It implies that money is invested in several loans instead of one and minimizes the risk of a default by the borrower. Finally, many P2P platforms provide buyback guarantee, which allows to compensate for overdue loans and pay out interest to the investor at the expense of a platform or loan originator.

Thus, non-guaranteed income is more likely a stereotype.

Lack of commercial confidentiality

P2P lending implies information transparency and openness of borrowers and investors. However, this doesn’t mean that the platforms do not ensure the safety of personal data. Moreover, given modern regulation, which toughens the handling of personal data (as, for example, the GDPR in Europe), only a limited number of individuals is allowed to work with investors. Borrowers have no information about the investor at all. So, ensuring the safety of all data received by the platform from individuals is obligatory, and any public disclosure is out of the question.

The same about investors: as a rule, they don’t have direct access to personal data of borrowers. Moreover, if the platform works according to the “peer-to-portfolio” model like Robo.cash, investors can only see the country, the term and amount of the loan. All issues regarding the loan and the borrower are settled by the lenders.

So, concerns about the lack of confidentiality are much exaggerated. Nevertheless, it is impossible to eliminate the risk of data loss and cyber attacks completely in any industry.

Easy money

Profitable interest rates and high turnover make P2P attractive to investors. Still, for many people easy income is associated with serious costs. These include fees for transactions on platforms, costs of website maintenance, tax deductions, costs for checking borrowers’ solvency, late repayment of the loan by the borrower etc.

It is also necessary to mention the liquidity risk, when an investor cannot withdraw funds to a bank account at any convenient time. However, it is more true for the platforms offering long-term P2P investments. In case of PDL loans, which are issued for a month or so, this risk can be considered relatively low.

Today, the leading platforms eliminate almost all the concerns mentioned above. In fact, the process of investing can be fully automated now and does not involve additional costs.

A hard-to-predict market

The relatively young industry shows prospects for development, but the situation varies in some regions. Thus, the tightening of regulation for P2P companies in the Chinese market leads to the closure of some services that cannot fulfill the requirements. From June to September 2018 alone, the volume of loans issued in the sector decreased from 1.02 trillion to 853.6 billion yuan. It was assumed that out of more than 1,500 crowdfunding sites operating in 2018, no more than 100 firms would be able to fulfill the new regulatory requirements.

Different approaches to regulate crowdlending platforms in Europe so far impede the creation of a single P2P market. Nevertheless, the progress is obvious: the issue appears on the agenda more and more often.

As for America, P2P lending will have 10% of the US lending market by the end of 2020, according to Morgan Stanley. One of the reasons is the credit deficit: the population and small businesses need small loans, which banks consider to be risky and not very profitable. This makes good prospects for P2P lending companies.

Experts predict that on the whole, the global P2P lending market will increase from 9 billion in 2014 to 1 trillion USD in 2025.

P2P is for the rich, skilled and brave

In contrast to the “easy money” myth, there is an opinion that P2P investments benefit only a select few. It is believed that an investor is usually a mature man with high level of income and prestigious financial education. There are also stereotypes connected with the place of residence. In fact, the data of Robo.cash shows that the average age of investors in Europe starts from 25. Only 8% of them studied finance at the university as a major, and 76% work full time.

With regard to the gender, it is true that far fewer women tend to invest — only 8% of the total number of investors. However, the size of their investments is on average 42% higher than men’s, while the investments are no less effective. So, it’s possible to say that men and women invest almost the same amounts.

As for the place of residence, it is true that that there are different financial instruments, opportunities and prospects, depending on the region and policy of a particular country. The national mentality also plays its role. But in general — P2P lending is available to everyone!

To sum up, many “myths” are made up unreasonably and deprive investors and borrowers of real opportunities. The interaction of investors and borrowers in the online environment helps improve P2P lending mechanisms. Certainly, one should remember about the difficulties and risks associated with high income. But choosing the right investment platform, P2P investors will not have to worry much about it.

2019-11-05