If you are a peer to peer lender, there’s a flaw in the system that leaves you carrying the can if the deal goes wrong.
Peer to peer lending – or P2P lending as it’s also known – is a disruptive technology taking many countries by storm.
But the model is weighted in favour of the platform and leaves investors to carry the can if borrowers default on loans.
The way P2P lending works is the platform is a matchmaker between investors and borrowers.
Investors rely on the platform to carry out credit checks on the borrowers and other due diligence before agreeing to release any cash.
Wild frontier of investment
Unlike banks, platforms do not lend their own cash, but skim a fee off the transaction to make their profits.
This seems fine until the borrower defaults. Some P2P platforms have default funds to cover the losses, but this typically is another skim on investor funds and fees to borrowers. Some have no backup in place for sour deals.
The platforms in some countries, like Britain, will fall back on having a licence to lend from the regulator and a code of conduct. Nevertheless, there is no financial compensation scheme to protect investments.
Some critics claim P2P lending is the wild frontier of investment with some key risks.
In the US, the world’s biggest P2P platform LendingClub Corp has seen the CEO Renaud Laplanche resign after $22 million of ‘near prime’ loans were sold to an investor without permission.
Bad debt shake out
The issue was investors have to trust that the platform is underwriting deals to their expectations even though they cannot see the facts that underpin the decision – and in this case the investor ended up with a stack of riskier loans than they expected.
The other concern is P2P is a new fintech and unlike the banks and markets, has yet to experience a serious downturn.
If and when this happens, how the shake out of bad debts will hit the sector is unknown.
Most P2P lending is unsecured, which leaves investors out on a limb. The platforms have nothing to lose, so can continue trading or fold, but the investors are carrying all the risk.
Another fear is lack of diversification in the P2P customer base. Some platforms lend to individuals and others to business. Customers often go to P2P because they cannot raise money through more traditional bank channels that are deemed to have stricter underwriting.
