The Evolution of Peer-to-peer Lending Industry

Started in the UK and US in 2005-2006, peer-to-peer lending industry has since grown to many countries over the last decade, with the fastest growth in China. P2P lending is also known as crowdlending in Europe or marketplace lending in North America, but these terms all refer to the same phenomenon – “crowd lending” or “social lending”. P2P lending platforms enable interactions between the borrowers and lenders side of the funding process. To create a well-functioning marketplace, the two most essential jobs for platforms are to recruit borrowers and lenders and to set the rules and terms of engagement. Besides market-making, key functions also include loan processing and activities contributing to building a community.

The P2P lending industry is unique. Its special feature is that both lenders and borrowers profited from the business relations. The borrower gets the needed money securely or services in time, and at the same time, investors/lenders who invest money into the P2P platform, gain real profit from the financial turnover and attractive annual fee. It is safe to say that no existing bank will provide you with such profit apart from investing money into the P2P platform.

Traditionally, the main sources of income for platforms in peer-to-peer lending are origination fees charged to the borrower, repayment fees charged to the lender, or other fees like loan part trading and late fees. How a P2P lending platform earns revenue depends largely on the business model of the platform and how the investment is structured. Over the last decade, P2P lending platforms have evolved from a handful of start-ups to a flourishing multi-billion-dollar industry.

Despite the benefits that P2P lending provides and the projections of experts that the industry would grow on to reach trillion-dollar industry, P2P lending is still far from realizing its goals as mainstream financial resources. In fact, the sector has been fraught with issues of default rates, frauds, and regulatory issues and recorded as high as more than 10% in online P2P lending alone, due to frauds.

This is where blockchain can help make processes more secure and reliable, given its distributed ledger technology. Blockchain can usher in a new era of financial transparency and reward the best behavior. Blockchain allows two parties to record their transactions in an efficient, immutable, and verifiable manner. It provides a strong barrier against unauthorized access which helps manifold in preventing fraud; one of the biggest issues threatening the rapid growth and expansion of the P2P lending industry. By putting their digital assets such as financial data and contracts on blockchain, P2P lending platforms can curb the issues of fraud and identity theft while restoring transparency between borrowers and lenders, as well as the platforms. Since 2019, major banks and financial services are starting to adopt blockchain technology in a variety of way, including building a global payment network.