Sharing is a good thing, we learned in kindergarten, but that wisdom was soon called into question by the grown-up world of getting and spending. Now, new age capitalism has spun out a wonderful invention: the “sharing economy,” which holds out the promise of using technology to connect disparate individuals in mutually profitable enterprise, or at least in warm feelings. The most prominent examples of the sharing economy are a taxi-hailing service called Uber and a real-estate-subletting service called Airbnb. Massive and insane popularities of Uber and Airbnb influenced different sectors to adopt sharing economy leaving banking no exception. Peer to Peer lending – also referred to as marketplace lending or P2P lending-was definitely the buzzword in the Fintech Industry last year. The lack of access to bank credit is seen as the primary reason behind the rise of the unorganized sector.

What is peer-to-peer lending?

The P2P business model is starkly different from that of traditional banks. P2P platforms don’t lend their own funds — they act as a platform to match borrowers who are seeking a loan with “investors” who purchase notes or securities backed by notes issued by the P2P platforms.
P2P platforms generate revenue from origination fees charged to borrowers and from a portion of the interest charged to investors as servicing fees, as well as additional charges such as late fees. Investors generate revenue from the remaining portion of the interest that borrowers pay on the loan. Borrowers benefit from a streamlined application process, quick funding decisions, and 24/7 access to the status of their loan. In 2005, the first peer-to-peer lending platform, Zopa, was established in the UK, followed shortly in the U.S. by Prosper, LendingClub, and others. Today, there are good number of peer-to-peer lending companies in the India, USA and Australia.

Types of peer-to-peer lending platforms:

Peer-to-peer lending has spread across various segments of the lending market. Some peer-to-peer
lending companies target specific loan types, including Retail Loan, Small Business Loans and Real Estate loans.

Who are the players in P2P lending?

P2P platforms – P2P platforms do not actually lend money. Instead, they develop Internet platforms that connect borrowers with investors.
Banks – P2P platforms partner with banks, to fund loans to borrowers. These loans are sold and assigned to the P2P platforms at the time of or shortly after funding.
Institutional investors – Institutional investors are banks, hedge funds, or other business entities that lend money through the P2P platform. For US P2P platforms, approximately 80% of funding comes from institutional investors. Approximately 40 different funds have committed to purchase assets from P2P platforms, with at least 12 different funds committing $200 million or more.
Individual investors– Individual investors are people who lend their own money through the P2P platform.

How does P2P lending market place work?

  • In order to take a loan from a P2P lending portal, user of lending marketplacehas to first get registered as a borrower. Borrower hasto then put in loan requirements, which contain basic information such as purpose of the loan, employment details, educational qualifications, financial status etc. After borrower posts requirements and a lender is interested he will approach you. It can even take multiple lenders to fulfill you loan requirement.
  • Peer-to-peer lending has been described as operating like an “eBay for credit,” taking the entire loan process online and allowing lenders to ‘shop’ around for appealing investments. A person visiting a peer lending website may register either as a borrower or as a lender.
  • The P2P platforms don’t make loans; instead, they serve as “matchmakers,” pairing borrowers with investors who are willing to invest. There’s more innovation in credit modeling and underwriting in P2P lending than with traditional lending, as many P2P platforms incorporate a wide range of data elements to move beyond traditional credit scores and reach a broader spectrum of potential customers.
  • Using loan listing profiles, lenders can decide how they wish to spread their money across multiple loans. There is a level of risk involved for lenders; the loans are unsecured, which entails that lenders stand to lose money if borrowers default and collections agencies are unable to recuperate the payments. For this reason, lenders typically invest money in small amounts across multiple loans to minimize risk. Rather than browse individual loan listings manually, many lenders (both individual and institutional) use automated investing tools that analyze loan performance data and automatically select and fund loans with the aim of maximizing returns while conforming to lenders’ preferences

Credit Scoring/Credit Report:

P2P platforms have developed proprietary algorithms that leverage behavioral data, transactional data and education and employment information to supplement traditional credit risk scores. Although these proprietary credit models have not been fully proven, they offer promising signs of innovation in credit decision making process. Some peer-to-peer lending companies use FICO scores as a baseline for screening out loan applicants below a given score, but also rely on additional selfreported information that traditionally are not reported to credit bureaus.

Great customer experience through technology:

  • By eliminating the brick‐and-mortar operating costs inherent to banks, peer-to-peer lending companies can translate the savings into lower interest rates for borrowers.
  • Currently, P2P platforms request only eight to ten personal data elements to complete the application process. It generally takes borrowers no more than 10 minutes to fill out the application.
  • P2P platforms offer a loan decision within minutes of receiving a completed application. Once the loan has been approved, funding can occur within three to five days of the application date.
  • P2P platforms provide e-signature functionality that allows borrowers to forego the traditional branch visit and complete the entire application virtually, including e- signing all required disclosures.
  • P2P platforms provide a simple graphical interface to show where the application is in the loan process, and to provide borrowers with easy access to check on the percentage of the loan that has been funded

Regulatory framework:

As of today, the P2P lending space in India and USA is completely unregulated. But the major players abide by legal framework under Section 138 of the Negotiable Instruments Act. The interest rates in most of the cases are entirely decided between lenders and borrowers and these portals have no say in it. They just charge a percentage of the lending amount from the lender. According to the startup Faircent.com India’s peer to peer market can grow to a size of around $4-5 billion in a span of 5-6 years. P2P lending definitely has the power to transform the state of any economy by reducing the cost and increasing the access to capital.

Prospects for Bangladesh:

Bangladesh is growing market and recent BCG report claimedthat marketplace and ecommerce will take new shape soon with the faster growth of MAC (Middle and Affluent Class) population, currently 7% of total population, and growing interest of consumers for online services. SMEs will also grow to larger scale. Access to finance and hassle free finance is much needed to boost financial inclusion. Bikory.com and Ekhanei.com already got huge traction and popularity in Bangladesh and online marketplace has a prominent future in Bangladesh as we have now 13 crore mobile subscribers and 5.5 crore internet users. The upside of the technological advent is the outreach for any person has increased manifold; one could reach out to anyone anywhere in the world at any given point of time, also reach out to several people across world simultaneously, at the same time. Adoption of similar lending market place in Bangladesh will usher new opportunity and new doors for faster access to personal loan and SME finance. Beside individual investors, banks and NBFIs can also join lending marketplace as institutional investors. A robust marketplace or p2p lending company needs to develop API and eco-system combining credit risk modeling, pricing and origination and loan service automation and third party management. Once the P2P lending platform lands, immense possibilities of financial inclusion and faster access to finance will impact the millions of lives through better customer experience and creating win-win situation for both borrowers and lenders.
Gazi Yar

Author: Gazi Yar

Gazi Yar is Author of Master Password & working as SVP & Head of Retail Banking in a commercial bank

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