For many years, Europe has been a major center for international finance, something which has been fostered by the rise of financial technology. Crowdlending has witnessed an explosive growth recently both in size and usage, leading to speculation that the sector could be a threat to the traditional financial institutions such as banks.
P2P growth has been fueled cutting out financial institutions such as banks and credit unions, which distort the interest rates that investors and borrowers receive. To show how rapidly peer to peer lending has grown over a short period of time, in 2012 business loans stood at 81 million pounds, but that figure jumped to 1.49 billion pounds in 2015, while personal loans increased from 167 million pounds to 909 million pounds. With this rapid growth, there is a significant potential to replace traditional lenders such as banks, as the sector is estimated to equal 30 billion pounds by 2022 in the United Kingdom alone.
However, many questions have been raised as to whether peer to peer lending can withstand the taste of time. There are fears that Crowdlending sites are not properly run due to recent cases like the now-bankrupt Quakle whose credit rating weighted factors such as trustworthiness over credit checks led to a nearly 100% default rate of lending on the platform. Moreover, there is a belief that an economic downturn could lead to significant losses to Crowdlending investors lack the scale and differentiating to manage losses and risks like traditional banks and credit societies.
However, this concern may have been exaggerated. Peer to peer lending marketplace is rapidly developing in conjunction with an appropriate regulatory environment that will allow it to become a robust investment.
The regulatory systems are not yet as effective as hoped, with the biggest p2p lenders in the European market growing and developing faster than expected.
The practices of the current p2p lending platforms are very different from platforms that failed, with the introduction of stronger credit checks on borrowers, reserve funds, availability secondary markets, and the increasing availability of private insurance. Also, currently, loan defaults are at an all-time low, with many platforms recording an average of 1.5%, but still, maintain high-interest rates. The viability and legitimacy of Crowdlending are further boosted by the availability of institutional investors who make up to 32% of personal loans and 26% of business loans.
However, Crowdlending should not just be viewed as an innovation that is displacing the traditional financial system. There are numerous benefits beyond low-interest rates to investors and quick loan applications for borrowers. Small businesses usually struggle to raise funds, which hinders their productivity in the economy.
For example, in the United Kingdom, peer to peer lending financed the small business with up to 1.26 billion pounds, which – although small – indicates the capabilities of Crowdlending to propel an economy of a country.
Another thing is the productivity gain from the peer to peer sector itself, with Crowdlending having a cost base a third of banks and other traditional financial institutions.
To fully incorporate p2p lending into the economy, the government needs to take practical measures to ensure viable growth in the industry, as well as putting to an end the unfair treatment towards conventional savings by the government.
Crowdlending loans can now be classified under the same regulations as investment savings accounts, which means that more interest earned will now be tax-free for peer to peer investors.
Peer to peer lending is also pushing the sector of finance toward greater credit accessibility in many ways.
By making credit available for small businesses, it means economic growth, support for local entrepreneurs, and potentially more job opportunities.
It has also helped free up funds for consumers that would otherwise be exploited by the credit card debt. These funds can be put into good use such as investing, which is beneficial to the economy.
With Crowdlending, high-achieving students can now pursue their dreams and become useful members of society.
This post has been written and sponsored by Crowdfunding Platforms. PlanetCompliance only publishes sponsored content from companies whose products and services we think our audience will find valuable or interesting.