P2P Lending — An Emerging Market Opportunity for Investors and Borrowers
In the wake of the 2008 economic crisis, banks and financial institutions tightened their lending policies and imposed higher costs and credit controls for borrowers. This led to a 38% cutback of overall distributed credit by the world’s top 10 banks. As a result of the harder access to credit and the often lengthy approval process, a new alternative financial market for consumer credit emerged in the peer-to-peer (P2P) lending space — a service offering a platform to connect investors and borrowers. P2P solves the issue of the costly and nerve-racking credit approval process as companies in the sector operate online with a lower overhead and provide consumers with a cheaper and more accessible alternative to classic borrowing.
Where indeed this market becomes exciting is the risk/return for angel investors. Investing in P2P loans yields returns averaging between the 5% and 12% which is significantly higher compared to investments in government bonds or setting up a bank deposit. Not only that but it is relatively safe as most platforms enable lenders to selectively choose borrowers based on their credit rating, as measured by the service provider and the option to diversify their investment by breaking up a single investment into a number of loans.
P2P lending is one of the fastest growing areas of finance worldwide. Additionally, the market has not fully matured yet and there are significant investment opportunities worldwide due to credit gaps and borrowers’ increased interest in the service. On a global scale, the P2P lending market’s estimated worth is around $200B as Asia holds the greater part of the share, followed by the US and the UK respectively. In all regions, the industry is rapidly developing and the potential of the market can further be seen in its compound annual growth rate. With a projected CAGR of close to 50%between 2016 and 2024, the P2P lending market’s anticipated rise provides for an excellent investment opportunity. In the next 10 years, given the estimated projections, the overall value of the industry can easily knack the $1 trillion mark.
While the market is rapidly growing, so are the fintech startups in the sector. Following this hype are both investors and entrepreneurs. In search for innovative and witty business models, introducing either platforms, marketplaces, direct party… the attempt is to tap on a larger market and earning the trust with as many lenders and borrowers.
My spotlight is on three hot P2P lending companies to look out for:
Is the top Korean P2P Lending platform launched in April 2016. With a talented management team, proprietary risk management and investor protection technology, Funded (56% Cumulative Monthly Loan Growth Rate) is looking to attack the Korean lending market which exceeds $620M for credit and secured loans.
One of the global market leaders in P2P Lending. While Funding Circle has raised over $320M in capital and has completed 7 acquisitions, its biggest milestone would be passing the $1 billion mark in terms of lending.
Despite the US, Asian and Western European markets are quickly getting saturated, Klear — coming out of Bulgaria, is targeting the emerging CEE market. With a strong international management team, Klear closed their seed round a few months ago as the company looks to capture the safer, low-rate portion of the market.
Would you trust a P2P lending platform for an investment? Which one is your favorite?