P2P lending platforms appeared on our browsers, and new papers, like crypto currencies, right after the financial crisis. P2P platforms are platforms in which two parties (Borrower and lender) directly contracts with each other. In this idea, banks are not intermediating anymore between lenders and borrowers. The P2P platforms do not lend their own funds but act as facilitators to both the borrower and the lender. Additionally, the platforms do the credit scoring and make a profit from arrangement fees, not from the spread between lending and deposit rates. This thereby cuts out traditional banking protocols. However, not all peer-to-peer platforms work the same way. For example, some platforms allow potential lenders to pick their borrowers, other oblige them to lend to all those approved for credit. This diversity of modus operandi of platforms is meant to provide specific types of services for different type of users. Experienced lenders, such as companies, would rather choose themselves who they want to lend to. Whereas, novice investors only aims at getting extra cash inflow, and therefore let platforms choose for them. All in all, the P2P platforms provide lower-interest rates, lower asymmetry of information, simplified applications, and accelerated decisions. The biggest platforms for consumer lending are Lending Club, Prosper and Sofi and have issued, by 2015, 1 million loans and are generating more than $10 billion a year. In this idea, P2P platforms seem to be very attractive in time of economic downturns by which lots of households are not able to get a mortgage or loan for reasonable interest rate. Banks have started to consider the threat P2P platforms could represent. Goldman Sachs (being one of the largest investment bank in the world) estimated that when peer-to-peer comes of age, it could reduce profits at America’s banks by $11 billion, or 7% (Fawthrop, 2019; the Economist, 2015; Investopedia, n.d). That being said, it seems so far, that peer-to-peer platforms seem to replace somehow the work of banks.
However can we consider this technological based service as a disruptive innovation? And will this new perspective of investment replace, the incumbent financial institutions?
Sources:
Fawthrop, A. (2019). Peer-to-peer lending platforms remove banks from the investment equation. NS Banking. Retrived on the 14th of October 2019 from:
https://www.nsbanking.com/analysis/peer-to-peer-lending-platforms/
Investopedia. (n.d). The 6 Best Peer-to-peer Lending Websites. Investopedia. Retrieved on the 14th of October 2019 from: https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp
The Economist. (2015). From the people, for the people. The Economist. Retrieved on the 14th of October 2019 from: https://www.economist.com/special-report/2015/05/07/from-the-people-for-the-people
