Technology has radically changed the way that most people manage their finances. Not only have developments in technology meant that we can manage our financial affairs from our smartphones, but they have also provided us with new ways of saving, spending, and investing our money.
The P2P lending sector’s strong performance has been seen as indicative of the consumer’s preference for more decentralized and personal financial management. However, the industry has recently experienced a dramatic slowdown.
How Does P2P Lending Work?
Peer to peer lending is a relatively new form of lending that first appeared on the market about 15 years ago. Since then, the sector has experienced some impressive sustained growth and has offered borrowers some of the most competitive rates available outside of the traditional bank lending models.
In theory, P2P lending is a more ‘democratic’ form of lending. With a P2P loan, borrowers and lenders are connected directly through online platforms. There are now a variety of P2P lenders operating across industries, providing more choice and diversity to those seeking personal or business loans.
If you’d like to find out more about how these platforms work and who some of the biggest lenders are, Crediful has a great article about it. Borrowing through a P2P platform can take longer for a borrower, but the available rates tend to be much more competitive than they would be when borrowing through a bank.
A Sharp Slowdown
But in spite of all the advantages that P2P offers, the industry seems to have hit a speedbump in the road. According to the specialist industry website altfi.com, the P2P lending market has experienced a decline, not just in the US, but around the globe. After two years of very strong growth, demand for P2P loans has decreased and the total amount borrowed has sunk by 20%.
Going Beneath the Surface
P2P lending is heavily focused on consumer lending, although this doesn’t account for the entire sector. While property lending is also important, the lion’s share of P2P borrowing is done by consumers looking for personal financing. While consumer borrowing through P2P lending has continued to grow, the rate of growth has slowed notably in the last couple of years. This can be explained in part due to consumers generally tightening their belts in the US and Europe, but this is only part of the story.
Property lending has taken a similar hit when compared to last year, although it is somewhat easier to identify the factors at play here. The residential housing market has been experiencing its own slowdown, so it is inevitable that borrowing and lending in this sector would fall.
P2P loans to businesses, almost all of them SMEs, are less common than other types of P2P lending but are still an important part of the industry. One of the most important players in this sector of the industry, Funding Circle, has experienced such a dramatic slowdown in its lending rates that its share price has tumbled to historic lows. The SME fund is now being wound down on the back of a number of unanticipated defaults. This is just one lender but their situation is emblematic of wider industry problems.
There’s Still Hope
While there is lots of cause for concern at the moment, there is no reason to give up on the industry entirely. Many investors are still enjoying returns of between 4% and 5% on their investments on the biggest P2P lending platforms. The platforms that are focused on consumer lending are the safest bet and are the ones that seem to be performing the strongest. Many lenders have started tightening up their lending rules to protect themselves from defaults in response to the Funding Circle situation.
There is also a suggestion from some corners of the industry that the slowdown on paper is actually a reflection of the fact that the industry is being more cautious and selective about who they lend to.
In today’s world, the traditional financial system is starting to look outdated in a number of ways, not least of all because it continues to primarily serve the interests of a select few elites. Removing these institutions from the equation and enabling borrowers and lenders to connect to one another directly opens up the financial system and makes it more accessible to more people. P2P lending is unlikely to go away anytime soon, it’s hard to look at all the other developments in financial technology and not see P2P lending as one of its brightest stars.
