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The History of P2P Lending Platforms

30 Oct 2020

Peer-to-Peer Lending is a simple concept that has been around for over 15 years – and even more. It follows the logic of a direct connection between borrowers and lenders, where all transactions are held online with no need for additional fee cost. But when did it first occur and what are the perspectives for the development of this practice?

Before Peer-to-Peer Lending

Lending is not a new concept. It first started as financial relations between individuals, based on trust. Then, special markets for credit started to appear where the main purpose was the exchange of money and goods. Customers were allowed to buy anything by using deferred payments. Sometimes the payments were held by different people. As time went by, traditional banking services stepped in and made the process fairer and more protected. But somehow the connection between borrowers and lenders fell apart.

First P2P Lending Platforms

With the widespread use of the Internet, the first modern online platforms for peer-to-peer lending began to appear. Let's take a brief look at the history of some of the famous representatives of the industry.

Brief history of Prosper

It is believed that Prosper is the name of the first p2p lending platform on the market. Founded in 2005, it launched in the US and now has more than $7 billion in funded loans.

At the very beginning, the platform was based on a variable rate model, described as an “eBay-style online auction marketplace”. Both lenders and borrowers were allowed to determine loan rates by using a Dutch auction-like system. In 2010 a formula with pre-set rates was introduced to the public. Prosper finally started to evaluate individual borrower's credit risk.

Brief history of Zopa

Just around the same time as Prosper launched, another competitor accrued – Zopa in the UK. The company was founded in 2004 but launched officially in 2005. It started to get big public exposure during the financial crisis of 2007–2008. In 2017 the platform started to get regulated by the Financial Conduct Authority. Just a year later, the team announced a huge next step for the company – the launch of innovative digital banking services. As of 2020, Zopa received a full banking license.

Brief history of LendingClub

In 2006, the p2p party was joined by LendingClub – one of the most recognizable platforms to this day. It was founded by Renaud Laplanche, and in 2014 it became the first lending platform with a successful IPO. LendingClub now owns five distribution platforms.

But don't be fooled by the success we tell you about! At the very beginning, all p2p platforms were met with a little bit of misunderstanding and skepticism. Quite logically, when it comes to money, people start to question every new service. High-interest rates and advantageous payback periods sounded like a scam, as there were no such financial alternatives at the moment. It took some time for early adopters to get the courage and try the platform for themselves.

Today Prosper, Zopa, and LendingClub are now among the most highly valued pioneers in the p2p business. Their visionary view of the financial market gave them an advantage like no other. Once again, it was proven that founders with a progressive mindset will always be rewarded properly.

P2P Lending Platforms During The Financial Crisis (2007 – 2008)

Barely founded, p2p lending platforms had already a big challenge ahead of them – the financial crisis of 2007. But was it really a crisis, rather than an opportunity?

As Interest rates started to reach zero in 2007, people started to look for alternatives. Taking the risk, lenders headed online onto p2p lending platforms, fascinated by better conditions and higher interest rates. There was also a high amount of new borrowers, ditched by banks, and looking for a way to save their businesses.

According to research by Havrylchyk, Mariotto, Rahim, and Verdier, as early as 2007, 1183 of the researched US counties had P2P borrowers, and their number has increased to 2609 in 2013.

Following the Domino effect, the economic crisis affected all countries around the world and led to last-minute regulations. We saw a lot of surprising bank collapses and loan defaults. It was harder than ever to maintain a profitable investing strategy. Banks lost a lot of credibility, and some say they are still trying to earn it back.

Amidst all this panic, the alternative of p2p lending was brought to the horizon to stay forever. We are excited to see how the proposals for the new EU crowdfunding regulation will affect the sector.

P2P Lending in China

As we mentioned, P2P Lending is performing well in the US and UK markets, but are you aware that China’s peer-to-peer lending market is the largest in the world.

Logically, the large population of the country is one of the main reasons behind the big investment demand from business owners. However, that’s not the only reason for the rapid growth of p2p lending in China. There are also other factors, such as:

P2P Lending Platforms in China are very technologically advanced; Most users of p2p lending services in China are retailers and small business owners, who are fighting enormous competition; The increased business competition and demand leads to bigger risk rating and higher interest rates; Borrowers need bigger sums for business funding, not for personal reasons; P2P platforms in China rely on conventional credit allocation processes; Overall, the credit and banking environment in China is very progressive and feels more reliable to the population, therefore people are open to trying new fintech solutions.

We also want to take a look at a very interesting report about China’s peer-to-peer lending sector created by The Association of Chartered Certified Accountants. Its results revealed that as of 2015 over half the borrowers from peer-to-peer lending providers who were surveyed said they had no previous history of borrowing from traditional financial institutions, credit societies, or other entities. How interesting?

Other results from the report also show that:

87% of the interviewed people selected the “low borrowing threshold and easy borrower audit process” as their main reason for borrowing through a peer-to-peer lending provider such as Paipaidai • 56% said that they had no previous borrowing history from other financial institutions such as traditional banks or credit societies • 51% said that their main reason for borrowing funds from a peer-to-peer lending provider was ‘to accumulate credit worthiness’

Even though China accepted the concept of p2p lending very well, some things also went wrong. Turns out that official regulators were not ready for the financial revolution. Some p2p lending platforms had liquidity crises, which adversely affected the reputation of the service. This large-scale crisis in China and numerous cases of fraud raised reasonable concerns among society. And yet, somehow, China managed to come up with a restructuring plan for resolving the crisis.

Overall, the p2p lending process in China managed to reach impressive results. It stimulated innovation of alternative financial solutions, simplified the borrowing process, and let individuals decide for themselves on how to control and invest their funds. Despite all difficulties, we must agree that P2P Lending in China proved its vital purpose for small and medium-sized enterprises in the country – and it can continue with big success if regulatory practices are applied in a correct and independent manner.

P2P Lending During the Pandemic

In the last decade, we’ve mostly associated the word “crisis” with the 2007-2010 period. Now is the time to add a new term to our economic vocabulary and investment experience - “finance during a pandemic”.

At the very beginning of the worldwide lockdown of 2020, the economy experienced an unprecedented situation. We saw how the stock market collapsed within minutes. Many p2p lending platforms dropped their maximum rate for investors. The mass panic reduced the demand and supply of the financial market. Everyone rushed to withdraw their money as if the whole world stopped and agreed that tomorrow is uncertain.

Then a few difficult weeks followed, which felt more like months. The bigger economic picture became more and more clear.

The unexpected rise in the unemployment rate has prompted many to look for alternative financing methods. With little to none credit reputation, borrowers started to hop on to p2p lending platforms. Others found an opportunity in the middle of the pandemic and sought the services of alternative lending.

On the other hand, a lot of people turned into Investors because ... Well, they couldn’t spend their money, and eventually started saving unpurposefully. Beginners decided to invest their money in the digital way. British regulators even decided to support the use of P2P platforms by adding them as a vital part of the Coronavirus Business Interruption Loan Scheme (CBILS)

2020 was harsh for the world but pretty favorable for P2P lending platforms. Stock Market fanatics saw the true colors of the market volatility, while P2P lending platforms managed to prove their reliability by withstanding the economic pressure.

P2P Lending Platforms in 2021

We already took a brief lough on p2p lending platforms over the past decade. It's fascinating to look back on time and see how at the end of 2015, platforms amounted to only 0.7% of the retail lending in the US. Today this percentage has increased significantly.

It is essential to note that 2020 has given us a good picture of the economic future. We believe that in the next 12 months we will enjoy the business fruits of the new digital future, funded by digital platforms. And as in the last year, everyone got back to supporting their local business owners, in 2021 it’s possible to do that by using a p2p lending platform.

Some financial experts like to assume the possibility of full disruption over traditional banking institutions. But would p2p lending platforms really be the trigger for that? Perhaps the fintech sector needs more efficient conditions for investing and easier access to services.

Alternatives equal financial freedom, that’s why the regulation of p2p lending platforms should be in the advantage of the sharing economy. To achieve this goal, the world needs:

Purposeful regulatory measures that promote opportunities for alternative investment and borrowing; Development of p2p Lending Platforms with a wide variety of features; A stable strategy for interaction and continuity with institutional investors.

P2P lending has proved its role in democratizing investment opportunities. That’s why in 2021 it will keep on helping Investors to get use of the full potential of their funds. We are curious to see how it’s going to be regulated in the future.