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Peer-to-Peer (and Peer-to-Business) lending platforms enable individuals to offer loans in return for interest. The concept was first introduced by British website Zopa in 2005, and was soon replicated in the US by Prosper and LendingClub (2006, 2007), and in Estonia by Bondora (2007). Other platforms came in their footsteps.
This first wave of lending platforms was successful, but also problematic. They usually charged service fees and offered no protection in case a borrower stopped repaying a loan.
Investors had to assess borrowers’ credit scores and hand-pick good loans. When a loan went bad, they lost money. In most cases they made profit, but not necessarily more than they would make on more traditional investment channels (like stock index funds).
Then, a new wave of platforms began to emerge. Twino, established in Latvia in 2009, was an early bird. The biggest boom came around 2015, mostly from the Baltic region, fuelled by a general rise in FinTech and alternative banking solutions.
In truth, some newly-established platforms still exhibit the “old wave” mentality. What I call the “new wave” isn’t distinguished by timing, but by mentality. “New wave” platforms are more investor-oriented, usually charging zero fees, and offering some kind of protection against default (non-repaid) loans.
These platforms introduced a new, simpler approach to investing in loans:
What you see is what you get. No more calculating fees and bad debt. No more guesswork about the ratio between good and bad loans in each credit score.
Well, I wish it were that simple. But that will be the topic of my next post. First we’ll review another important change: The emergence of a new type of loan financing platform.
P2P isn’t always P2P
The original P2P/P2B platforms served as direct mediators between investors and borrowers. They accepted loan requests, assessed them, and allowed investors to finance these loans. When a loan gathered the necessary funding, the money was transferred to the borrower.
But not every borrower seeks a loan online, or has time to wait for enough investors to finance their loan request. Many borrowers still turned to old-fashion credit companies.
Then came loan refinancing marketplaces, which serve as mediators between investors and credit companies (also known as “loan originators”). These credit companies grant loans outside of the marketplace, using their own marketing channels and capital. After handing the money to the borrower, they list the loan on the marketplace, where investors can buy the rights for part of the borrower’s debt. By refinancing their loans, credit companies free up capital and are able to grant additional loans.
Loan refinancing marketplaces aren’t technically “peer-to-peer”, as investors deal with loan originators rather than end-borrowers. However, both types of platforms offer a similar product from an investor’s point of view, and are often included under the umbrella term “P2P lending”. When referring to both types of platforms, I’ll be using the more accurate term: “loan financing platforms“.
Industry on the Rise
Loan refinancing marketplaces are important for two reasons. First, credit companies have their own capital, and are more able to compensate investors for default loans. This helped promote default guarantees as a common practice. Second, a single platform can offer loans from different credit companies, big and small, in different fields and from different countries.
An obvious example is Mintos, the rising star of loan refinancing marketplaces. This 2014 Latvian company has become by far the largest platform in continental Europe, offering loans from dozens of originators in dozens of countries worldwide. Mintos is a market leader and trend-setter – and it has recently announced its intention to apply for a banking license.
This gives you an idea about the path this industry is taking. Online loan financing is here to stay, it’s turning from a niche investment into a mainstream practice, and it’s becoming part of the digital banking revolution. In 2018, the industry measured in dozens of billions of Euros, and it’s just gaining momentum.
But it’s not all milk and honey
In the next post I’ll review some of the benefits of investing in loans, but also the pitfalls and dangers that these platforms – and investors – are facing.