Basics of Peer-to-Peer Lending: Market to reach US$490B by 2020
In the aftermath of the much publicized Ezubao Ponzi scheme that wiped away US$7.6 billion of some 900,000 Chinese investors’ monies, we thought it would make sense to revisit the original thinking behind peer-to-peer (P2P) lending.
Depending on who you ask the numbers vary with the common value being in the billions of US dollars. According to Statista says P2P lending was US$9 billion in 2014 and expected to reach US$64 billion one year later. By 2050 the value is expected to be close to one trillion U.S. dollars.
We invited Mukesh Bubna, founder and CEO of Monexo Innovations, one of the earliest commercial P2P lending platforms in Hong Kong to talk about the foundations of the technology, including how it grew from the UK, expanded into the US, and is now a US$ multi-billion business. We asked him the history of P2P lending, pre- and during the digital age.
One of the biggest advantage of P2P lending is that approval, and conversely disapprovals, can happen relatively quicker than conventional loan applications with banks or credit lenders, particularly as there is no collateral to value the loan against. However, more prudent – and potentially safer P2P lending institutions – do follow some form of application evaluation process to check the identity of the lenders and borrowers to comply with anti-money laundering and know your customer rules, as well as the ability of the borrower to pay back the loan in a specified short period. Perhaps what distinguishes online P2P lending platforms is the promised transparency that some fintech businesses offer.
Bubna makes it clear that with Monexo Innovations any potential lender can get a glimpse of the credit worthiness of borrower by looking at the characteristics of his borrowing history. He makes it clear that identities are protected so visibility is limited (and rightly so) to the characteristics of the lending platform. The onus is on the platform operator to ensure the quality of both borrowers and lenders in the ecosystem.
Bubna reminds us that even in banking there are risks involved. Higher returns will always be accompanied by higher risks. But by spreading the lenders’ monies across multiple borrowers (in smaller chunks), the risks to the lenders are reduced. For the borrower, the promised interest rates in a shared economy are lower than convention credit card loans.
The Ezubao Ponzi scheme may generate short-term negative repercussions against the P2P lending platform but the need to fulfill the demand remains. What has happened in China is an example of when regulation follows a loose model of management. China’s central bank has quickly tightened its hold on the P2P lending landscape following the closure of Ezubao on December 8, 2015. Regulators in other developing and emerging markets would do well to observe the events that transpired but take inspiration from the model that the UK and US have undertaken to create a healthy and vibrant P2P lending ecosystem that supports the ecosystem as a whole.
The overall outlook for P2P lending remains positive despite all the hiccups around the world. BusinessDay quoted Morgan Stanley as predicting that P2P Lending in Australia alone will reach US$22 billion by 2020. A Morgan Stanley Blue Paper estimate the global P2P pending market could command between US$150 billion to US$490 billion by 2020 just by watching the four markets of US, UK, China and Australia. What is clear in the charts is that China will dawrf all markets globally as it has already done in 2014 (see Figure below). According to their estimates, the CAGR from 2010-2014 was 123% and estimates a more most 51% CAGR from 2015-2020.
Source: Company Data Morgan Stanley Research