An overview of peer to peer (P2P) lending

Published on October 31, 2016   10 min

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This talk is going to provide an overview of "Peer-to-Peer or P2P Lending"; that's sometimes called "Marketplace Lending", for example, in the United States. I'm Professor Alistair Milne, Professor of Financial Economics at Loughborough University, in the UK. And I specialize in my research, amongst other things, in financial technology.
So what is peer-to-peer or marketplace lending? Well, it's direct lending from an investor to a borrower. So what's different from most bank loans is that there's no bank balance sheet involved. There isn't a bank taking a deposit, then making a loan. Rather the investor, which could be a household or possibly an investment fund, lends directly to a borrower, which could be a household, or maybe a small business, or indeed it could be some sort of investment opportunity as well. The idea is inspired by the "sharing economy", so new platforms, mobile, online platforms, such as Napster, which was the initiative, now failed, which changed the music market, Uber, and Airbnb in taxis and hotel accommodation bookings. It is a little bit different, as we'll discuss in a moment. In practice, quite a lot of the investment comes from large financial institutions. It's grown quite rapidly from small beginnings a decade ago. So in the US the largest peer-to-peer or marketplace lenders is Lending Club, there's also Prosper and some others. In the UK, we have the very first peer-to-peer lender, Zopa, Funding Circle, who specializes in small business lending, Ratesetter, Thincats and others. China has seen spectacular growth in peer-to-peer lending. But the regulation on the development of financial system is very different there. So it's rather different, more speculative, more risky than what's taking place in the US and UK. It's also been appearing in other countries too, so Spain, Australia, and others are beginning to see developments. As I've said, in the US, it's got a different name, "marketplace lending". So I'm gonna tell you a bit more about peer-to-peer lending. The background, the overall question, "Is this going to replace banking, as we know it?" As you'll see, I'm going to suggest that while this is an important development, it's not quite such a dramatic change as some have suggested.