The Peer-to-Peer Era: how P2P lending developed

The P2P lending market is growing rapidly: according to forecasts, its annual volumes can reach $898 billion by 2024. Although the low base effect is gradually weakening, and the average global growth rate has reduced from 250% to 30–50% a year, the market is still far from being saturated. Today, we will look into the development of P2P lending and the reasons for such a big interest of borrowers and investors in it.

Right for a credit

It is believed that the financial segment appeared in 2005. However, the starting point for the full-scale development of P2P lending was the global financial crisis of 2008–2009. At that time, bank lending was virtually paralyzed, because according to traditional banking approaches, credit risks became high and difficult to predict.

At the same time, the central banks in Europe, the USA and Japan started implementing the policy of zero or even negative interest rates to stimulate lending. According to the monetary theory, this should have brought the economy out of crisis. However, this policy was not as effective as expected: the money either remained in the accounts of commercial banks, or flowed into the stock market, almost without entering the real economy.

People and SMEs had an ambiguous situation. If there was investment capital, there was nowhere to invest it (outside the stock market) with the returns that would exceed inflation. Also, when money was needed for the development of small business or personal expenses, it was difficult to borrow it. In such circumstances, the idea of ​​P2P lending was highly competitive, as it allowed investors and borrowers to interact directly. Therefore, the demand for such platforms started increasing rapidly. At first, investors financed only consumer loans, but after the crisis, this model was transferred and applied for SME lending. After the recession, the economic activity started growing, and the companies needed money to expand their production, but the bank lending was still hard to access.

Thus, after the crisis, when the P2P model went beyond the UK and started emerging in Europe, the USA and Asia, business funding projects began to appear. Since the size of such loans was much bigger, it became possible to split them: several investors could invest in a single amount borrowed by one company.

Entrepreneurial spirit of China and conservatism of Europe

After 2010, the P2P lending started booming in China. Quite rapid development with the market growing annually by about 150–200% from 2013 to 2017, occurred due to the low availability of loans for the population. Chinese banks mainly focused on state-owned companies: the market was big, and there were nearly no default risks. For small private businesses and the population, there were almost no credits left. At the same time, interest rates on bank deposits in China were quite low and did not exceed the inflation rate. Thus, for the Chinese, the P2P model looked even more attractive than for the Europeans or Americans.

Entrepreneurial spirit of the Chinese population led to quick increase in the number of P2P companies. In 2017, there were about 2,500 of them. However, apart from the honest market players, there were a lot of Ponzi schemes pretending to be P2P platforms and offering abnormally high interest rates for investors. In these cases, their money did not go to borrowers directly, but was accumulated on the company’s accounts and often paid to previous investors.

The emergence of a bit late, but very strict regulation in 2016–2017 made Ponzi schemes go bankrupt by the second half of 2018, and the number of the companies decreased to 1.500 (by comparison, the UK has less than 100 P2P companies, the USA — about 300). Unfortunately, it caused losses for many investors. However, even now the Chinese P2P lending market remains the largest in the world, with annual volumes exceeding $ 300 billion. It also has a great potential for development, in line with the already regulated and transparent market.

The European P2P lending market currently has about 300 platforms, which issued about £4.7 billion in the UK and €2 billion in the rest of Europe in 2017 (according to Cambridge Centre for Alternative Finance). About 50% of the platforms belong to the UK, Germany, France and Italy. Some of them operate cross-border. The timely emergence of regulation in Europe allowed the market to develop more smoothly than in China.

Today, the P2P lending is gradually spreading from Britain and Western Europe to the Baltic and Southeast European countries: there are a few players there, but they are gaining momentum. Another feature of the modern P2P segment is its growing cross-border nature: for example, European investors can lend money to Asian borrowers. Given that Asian economies offer bigger interest rates than the European, investors have an opportunity to earn higher returns.

In general, P2P lending is growing in popularity as a profitable, flexible, high-tech segment of the financial market for both investors and borrowers involved in the process.