What a difference a decade or so makes. When peer-to-peer lending first appeared in 2005 (the UK was its birthplace), it was regarded as distinctly “niche” - perhaps a polite word for “ephemeral and insignificant” - by the major established lending institutions. Fast forward to 2016, and the picture looks totally different. The “niche” descriptor for p2p lending has given way to “disruptive” - code for “seriously challenging and highly successful.” We thought it would be interesting to take a walk through the history of the peer-to-peer lender industry, subsumed from the outset under the heading “alternative finance.” So here we go.
Peer-to-peer lending has been in use since the 1700s. Jonathan Swift, the author of Gulliver’s Travels, loaned small, interest-free amounts of money to those in need. During the 18th and 19th centuries, p2p lending (or “social lending” as it was called then) became one of the most prevalent lending methods in Europe.
The advent of agile finance technology (“FinTech”) gave peer-to-peer lending a new boost in the 21st century. Early peer-to-peer lender platforms sought to be an alternative to the banks (hence the generic term “alternative finance”), bringing individual borrowers and lenders together via an online platform.
Essentially, that still remains true, with an important caveat to be mentioned later. Peer-to-peer lenders can keep the costs of borrowing low because they aren’t encumbered with the costs of running bricks-and-mortar premises. Moreover, their cutting-edge technology is far nimbler than the aging legacy IT systems of the banks, which are too expensive to replace and incapable of processing applications for borrowing anywhere nearly as quickly as p2p lenders.
In the UK, digital peer-to-peer lending was very much a “minority sport,” that is, until the financial crisis of 2008 struck following the collapse of Lehman Brothers. This was a real turning point: public confidence in financial institutions haemorrhaged, and huge numbers of individuals and SMEs found themselves unable to secure credit at a reasonable interest rate. Peer-to-peer lenders began to be seen as a viable and attractive alternative.
By 2014, a poll by UK innovation charity Nesta had found that 77 percent of companies that had used p2p borrowing were “likely or very likely” to use it again.
In the aftermath of 2008, the banks increasingly began to view the rising popularity of p2p platforms with growing anxiety: these platforms were no longer marginal, and they offered seriously worrying advantages with which the major institutional lenders knew they would struggle to compete. These advantages included low-interest rate loans, higher rates of return for investors, greater access to finance for individuals and SMEs
Now we come to the caveat mentioned earlier: while peer-to-peer lenders such as the UK’s Unbolted still connect individual borrowers with a pool of individual lenders (Unbolted offers a unique secured asset loan that requires no intrusive credit searches), more p2p platforms are attracting institutional investments. The relationship between banks and p2p platforms is shifting from rivalry to partnership, with banks increasingly viewing the platforms as providers of services that they would prefer not to deliver directly to individuals and SMEs. To that end, the quantity of lending capital coming to the platforms from institutional investors (hedge funds, insurance companies and banks) is steadily growing.
From its intrepid, “minority sport” beginnings, peer-to-peer lending is here to stay.
