The P2P lending industry is seeing significant growth, especially in developed countries with strong financial markets.
P2P lenders in the US generated $6.6 billion in loans last year, up 128%. The US has one of the largest P2P lending markets in the world by loan volume, but the UK's is 72% larger on a per capita basis. Low consumer confidence in banks (even before the financial crisis), a high degree of comfort with online platforms, and a positive regulatory environment have all helped nurture the UK's P2P lending market.
Europe is the next big market for P2P lending: The alternative finance market in Europe reached nearly €3 billion ($3.9 billion) in 2014, a 144% jump, and small-business P2P loan volume in France grew almost 4,000% last year, to reach €8.2 million ($10.6 million).
For the lender/investor, P2P offers returns above what banks offer in terms of interest rates. Moreover, since P2P investing is generally highly diversified, investors experience less risk than with traditional investments.
The wave of disruptions in the financial sector gained strength after the global financial crisis of 2008-09. While the heavy losses forced banks to become stricter about loan disbursements, the chaos and fragility in the system caused dissatisfaction with commercial banks among borrowers.
The time consuming, lengthy and rigid procedures of ‘exposed’ banks made way for more innovative lending and borrowing options. The result was the rise of peer-to-peer (P2P) or marketplace lending which offer simplified and quick procedures, quick lending decisions and better interest rate deals for borrowers as well as lenders, with more transparency.
Today, P2P platforms are among the fastest growing segment in the financial services space. The market for alternate finance gained popularity in recent years. the opportunity in the global peer-to-peer market will be worth $897.85 billion by the year 2024, from $26.16 billion in 2015. While the P2P lending in the U.S. is still in its infancy, it is growing at a faster pace in comparison to other financial services. Europe’s alternative finance market is a mix of crowdfunding, P2P lending and other activities, grew by 92% in 2015.
Three factors contribute to P2P lending companies’ ability to operate more efficiently than traditional lending institutions. First, since—at least until the present—the majority of P2P lending companies have been online exclusively, they can operate with one or two physical locations, rather than thousands. And fewer physical facilities mean fewer employees are needed to staff them. Finally, fewer building require less infrastructure, such as computers and IT networks, to support them.