What is peer to peer lending? 05/10/2017
Peer to peer lending is a little bit of an old fashioned phrase these days. It has, however, become the ubiquitous description of our industry.
‘Peer to peer’ was essentially coined to describe the networking effects of computers where one computer would perform a task on the network and was equally as important as another computer doing a different task on the same network.
The phrase was popularised by file sharing sites such as Napster where individuals on the network would share music files.
‘Peer to peer lending’, who coined it?
Our friends at Zopa started the peer to peer lending industry off where individuals lend to individuals and that phrase kind of stuck. Peer to peer lending is now used to describe individuals lending to businesses, lending on invoices, collective mortgage lending etc.
The essence of peer to peer lending, however, is that individuals are connected directly to the borrower. The lines on this are beginning to be blurred with some companies (Funding Circle springs to mind) abandoning the ability to select loans in favour of a ‘fund management’ model.
Peer to peer lending legalities
Here at Ablrate, while we are working on products that allow a more automated approach, we still believe in the self-select model. We also have built our platform around a fundamental belief that the legalities of loan. This is where liabilities and benefits are detailed between borrower and lender on a bilateral basis between borrower and lender.
Each peer to peer loan on our platform is documented automatically between the borrower and the lender. This creates a true peer to peer legally binding contract between lender and borrower. The loan documents signed by us (as Lender’s Agent) detail all the covenants and security in the p2p loan.
P2P and Financial Advisers
You might be asking yourself why your financial adviser has not included a recommendation for p2p loans to be included in your portfolio. You could easily conclude that they don’t know, or they don’t care. This would be a harsh judgement.
Advising on pure peer to peer lending companies like Ablrate, would require the adviser to make a recommendation on each loan. This would be burdensome for advisers who now are forced to charge by the hour.
It would be more reasonable for them to advise customers to seek out those platforms that offer a less transparent service on lending i.e where the platform decides where your funds go (either via manual or automated processes).
I do see a time where advisers may have specialist departments dealing with peer to peer advising. It would not make sense for an adviser to not at least educate their customers on p2p loans. Especially when the industry is providing a service where rates are much higher than traditional services.
I also think that with the rise of ‘Robo Advice’ there may be automated ways of advisers and peer to peer lenders to work much more closely. Imagine a scenario where your robo-adviser puts you into loans and out of loans based around your various financial goals.
No.. wait a minute… don’t imagine that… we will work on it for you!
In all seriousness the technology being applied to the financial industry now is tremendous. People who may not have any experience of the financial markets at all are looking at what they want to achieve with their money and designing the software to do it. It is both scary and exciting at the same time and a massive opportunity for both sides of that divide to work together.
Peer to Peer lending future
Many peer to peer lenders will, no doubt apply for banking licenses and become the things they were created to disrupt. It is the natural order of things that a successful financial company will seek to diversify its range of products to capture more of a customer’s funds. Think of your bank providing credit cards, mortgages, insurance etc.
There will be, however, companies that look to push peer to peer further perhaps using blockchain technology or applying peer to peer to other aspects not yet seen. Whatever the future I personally cannot see the peer to peer lending genie being put back in the bottle.
People are so much more financially savvy these days, have much better access to information and technology and have been bruised by the fees charged by intermediaries. This leads to the upsurge of peer to peer lending and will continue its trajectory for some time.
I happen to believe that many of the financial inequalities we are seeing around the world can be solved by financial technology (“Fintech”) and we are just a small cog in the wheel.
Big data will level the playing field in markets and make them more efficient, rather than being the playthings of the large banks and traders.
As a quick example, imagine all the tweets on StockTwits (twitter for stocks and shares) and all the news articles on a particular company could be analysed instantaneously. Then throw in chart data, historical data and current market sentiment.
Make all that available for feed into your robo-adviser, that makes stock choices for you. Why would you need a fund manager? If you could make consistent returns and regular investment using this data there would be trillions (with a ‘t’) returned to capital owners (i.e you) and not intermediaries… imagine how that would change the world.
Peer to peer lending resources
Lenders Guide: You can sign up for our peer to peer lending guide here. This details the market itself and what you should look for in a peer to peer lender.
P2P Finance News is a great source of industry news and educational articles.
Altfi is also a great source of industry news
Crowdfundinsider gives a global perspective on the industry and has covered much of Ablrate’s progress.
P2P banking publishes and interest loan volume list that shows you who is doing what business.
Innovative Finance ISA – If you want to learn about tax-free lending, have a look here
Peer to peer lending wiki here