The rise and rise of peer-to-peer lending
27 October, 2015
The rise of peer-to-peer lending — what is it, and where is the industry heading?
Peer-to-peer lending is an increasingly popular way of financing personal loans through small contributions from a large number of lenders. It is a form of crowdfunding where borrowers and lenders are connected through an online trading platform. The online platform offers the infrastructure to match-make investors on the one hand, with credit-checked borrowers on the other, and charges a fee for the service.
This online service challenges the traditional business model conducted by the big trading banks, and can be seen as an early-in-the-cycle disruptive technology.
There are now four companies licenced by the Financial Markets Authority to conduct peer-to-peer lending in New Zealand. Looking through the websites of each, the early leader of the four is Harmoney, which has loaned out in excess of $130m since starting just over a year ago. Harmoney is partly owned by Heartland Bank and Trade Me and has aspirations of being a big player in the Australian marketplace too.
The other three licenced companies are just in the process of starting their businesses, and once they are more fully up and running, this will further lift the profile of the industry here.
I saw one estimate that the industry in the USA is doubling in size every nine months and that the total world market for peer-to-peer lending will approach $100 billion by the end of next year, so this is clearly a growth industry.
What are the advantages and disadvantages of peer-to-peer lending?
There are several advantages to this style of lending.
The process is quick and relatively seamless and has been vetted by the Financial Markets Authority.
For borrowers the advantage is that they may not have the credit history to borrow more from traditional banks, so this is a potential source of funding that may not be available to them elsewhere.
For lenders, this type of lending will typically offer higher returns than bank deposits — but of course, the risk of default will be higher too.
As with all these things, there are a number of disadvantages. For small loans, the fees can be relatively high, and unlike breaking a bank deposit, you are unable to get your money out as a lender until the loan matures.
So in conclusion, what do you make of the peer-to-peer industry?
Well it's still early days, but given the initial success of Harmony in New Zealand, and the growth in the industry offshore, it looks like peer-to-peer lending, just like crowd funding, is here to stay.
It is not without risks. There have been reports of defaults of some platforms offshore and the industry hasn't been going long enough to accurately assess the risks of the business model.
I think common sense needs to prevail. Borrowers must read the fine print, to know what they are getting themselves in to. They also have to decide whether it is prudent to borrow money for the particular purpose they have in mind, and if not, don't do it.
For lenders, I think that they have to ask themselves whether they can afford to lose this money. If not, don't invest.
Notwithstanding the risks, like I said, peer-to-peer lending is a growth industry that's here to stay.