P2P Lending is mostly anonymous and loans are unsecured. To make the risks of lending to a stranger acceptable for lenders, p2p lending services had to provide models for the lenders to judge the dimension of the risk of not getting paid back.
The initial estimation of the risk-level could not come from the platform itself as it had no track record and could not build a model that “calculated” the level of risk involved for the lender. The consistent consequence was that nearly all p2p lenders relied on established third party providers for credit history data and credit scores. Prosper for example showed Experian data on default levels to be expected depending on credit grade.
Over the time it became obvious that the actual default levels at Prosper were much higher than the expected default levels based on Experian data. We don’t actually need to argue here what led to this (be it financial development of the economy, be it that p2p lending attracted bad risks, be it a poor validation process), but the result was that since defaults were much higher than expected, lender ROIs were much lower than expected at the time of the investment.
And this is not Prosper specific. Several other p2p lending services show clear signs that default levels will (or have) surpassed the initially published percentages of defaults to be expected based on external data.
Boober failed due to default levels, on Smava levels are higher than the Schufa percentages fore-casted, same is likely for Auxmoney defaults which will be higher then Schufa and Arvato Infoscore data suggested. The one exception from the rule is Zopa UK, which successfully manages to keep defaults low, as CEO Giles Andrews rightly points out.
P2P lending services continue to grow. In some markets the speed of growth has even accelerated.
P2P-Banking.com has created the following overview table listing services in operation and ranked them by loan volume funded in the past 6 months. This image may be reprinted on other internet sites, provided it is not altered or resized and the following text (including the direct link to this article) is given as source directly below the image: Source: P2P-Banking.com
For some service like the Korean Moneyauction and Popfunding no figures were available. Also omitted are some services that did not reply to information requests.
Note that Prosper.com was closed for most of the observed time span and did not make the minimum cutoff for the table. Also note that Zopa Italy is currently closed.
Especially british Zopa and the German services show strong growth lately. Smava nearly doubled loan volume in July compared to June (chart), whereas Auxmoney tripled it (chart). At Smava currently even 25,000 Euro loans (approx. 35,750 US$) are funded with bids in only 4 minutes (!) bidding time (example loan).
On the other hand MYC4‘s growth slowed in the last months (chart) due to problems with the providers loan picks.
As reported earlier Dutch site Boober.nl failed. Richard van den Toorn, speaking for the association of lenders PIVN, estimates that about 1,200 lenders are affected. While part of the total loan volume of 1.65 million Euro had been repayed over the loan term before the failure, overall borrower’s willingness to pay dwindled after the failure. Still PIVN hopes to recover 50-80% of the outstanding amounts on behalf of the lenders.
P2P lending holds great promise: more transparency, purposeful direction of investments and economic advantages for borrowers and lenders. Some even talk of democratization of financial processes.
But are advantages and risks evenly balanced between borrowers and lenders?
For the borrower p2p lending fulfills most promises and the only risk is that the desired loan goes unfunded. Most services have a simple fee structure with no hidden fees and the borrower only pays fees when he does receive the wanted loan. And within a time frame of a few weeks after sign-up the borrower reaches his goal – once his loan is funded and the money is transferred to his account. Platforms with auction mechanisms can even benefit the borrower further in supplying the loan at a lower interest rate then the maximum he set.
The lender on the other side is promised an attractive return on investment but faces multiple risks:
borrower fails to repay the loan
(identity) fraud
p2p lending company fails and ceases to service loans (e.g. Boober Netherlands)
unreliable forecasts of ROI and default rates
on some services: open/undefined tax and legal issues
on some microfinance services: currency exchange risks
on some microfinance services: risk of MFI failure
There is also an information asymmetry. The borrower usually has most of the information he needs in advance and the information he has is accurate. Should the information be not accurate (e.g. wrong information on at what interest rates he can be funded) then he can retry at no additional costs only incurring a delay. The lender has information, which is partly based on estimates or forecasts that might prove unreliable and other parts of the information might be untrue (e.g. borrower reported income or borrower description of purpose of the loan). For privacy reasons it might also be a subset of the information the p2p lending service itself has on the borrower (e.g. town of residence omitted, or income or jobs listed only in categories instead of values).
The lending experience of the lender is further hindered by the timeline. The problems may impact him at any point in time of a several year loan term. And he either has no way to terminate his investment immediately or if there is a secondary market he might be only able to do so by accepting economic disadvantages in return for the option to selling off.
The situation of the lenders in this comparison to the borrowers is worsened by the alignment of interests of the p2p lending service company with the borrowers. This is due to several factors:
in most models borrowers pay the larger part of the fees and are thereby important for the revenues
in some markets attracting borrowers is the limiting factor for growth
for obvious image and marketing reasons the p2p lending company is not eager to share information on fraud and (in some cases) default details
for the same reasons companies are slow to react and change their lender information when real default levels are much higher then fore-casted (or even advertised) default levels (examples are Prosper, MYC4)
This imparity results in different levels of satisfaction with the p2p lending service for lenders and borrowers. While those p2p lending services that offer (unmoderated) discussion forums have only few unsatisfied borrowers voicing their opinion (and then mostly on technical issues) lender concern and critic rises over time on some of these services (to the extend that Prosper even deleted it’s forum at one point in time).
In the Netherlands p2p lending service Boober apparently has ceased operations. The website Boober.nl has been inaccessible for days and no one was available for comment as the phone went unanswered.
There are reports by lenders, who complain that loans are not serviced as usual. Even one borrower is seeking help, because he cannot get the monthly payment through to Boober.
As of the moment it was not possible to determine how outstanding loans will be dealt with.
P2P lending is spreading internationally. While the biggest loan volumes are generated in the US market, many p2p lending websites have been established in other international markets.
social lending services enabling micro financing (e.g. Kiva, MyC4) – participants driven mainly by social motives
other concepts (e.g. Virginmoney which is special in the way that it does not do the matchmaking between borrowers and lenders, but supports the process between persons that already had offline relations- slogan “We manage loans between family and friends“)
Sites funding student loans can fall into any of these three categories or combine motivations.
P2P-Banking.com has created the following overview table listing services that are in operation and ranked them by loan volume. The loan volumes are not directly comparable for they are cumulative since launch of each service and represent different time spans.
Asked for a figure, a Microplace spokesman pointed out “…it is important to note that MicroPlace is not a P2P site. We are a platform that offers investments to the retail public.“. No loan volume was quoted, but he stated “investments purchased on our site have enabled over 26,000 microfinance loans.”
In total approx. 685 million US$ have been funded through peer to peer lending/social lending services so far worldwide.
This image may be reprinted on other internet sites, provided it is not altered or resized and the following text (including the direct link to this article) is given as source directly below the image: Source: P2P-banking.com
If you are a representative of a p2p lending service and want your service to be included in the next update of this table, please send me an email with information about your company.
