Marketplace Lending: What It Is, How It Works & Platforms

July 5th, 2024

23 minutes read

Marketplace lending is a modern financial practice that facilitates the direct borrowing and lending of funds between individuals or institutional investors through online platforms. By leveraging technology, marketplace lending platforms match borrowers seeking loans with investors looking to lend money, effectively bypassing traditional banking intermediaries.

What is Marketplace Lending?

Marketplace lending, also known as peer-to-peer (P2P) lending, has transformed borrowing and lending by connecting borrowers directly with investors through online platforms, bypassing traditional banks. This model democratizes access to capital, as borrowers can swiftly apply for loans online, often receiving funds within days, in contrast to traditional bank procedures. Investors benefit by diversifying their portfolios across various loan types and risk levels, earning returns through interest and principal repayments.

Sophisticated algorithms assess creditworthiness using diverse data points beyond traditional credit scores, fostering more inclusive lending decisions. This approach expands access to credit for underserved populations.

Key Takeaways

Online marketplace lending allows individuals or institutional investors to directly engage in borrowing and lending, bypassing traditional banks.
Marketplace lending attracts borrowers and investors with its streamlined processes, competitive rates, accessibility, and potential for superior returns relative to traditional investments.
Marketplace lending platforms use algorithms and promote inclusive lending by considering diverse data and expanding credit access for underserved populations.
Banks are also embracing marketplace lending, highlighting a transformative trend in finance.

Understanding Marketplace Lending

Marketplace lending has swiftly emerged as a viable alternative to conventional financial services, captivating both consumers and small businesses. This modernized method bridges borrowers directly with lenders via online platforms, bypassing traditional banking channels. Marketplace lending is gaining traction among borrowers and investors alike, as a result of its efficient processes, competitive interest rates, and ease of access. This innovative model not only simplifies the borrowing process but also offers borrowers more personalized lending options. Moreover, Marketplace Lending provides investors with opportunities for diversification and potentially higher returns compared to traditional investments.

Many banks are entering into marketplace lending, either as investors or through forming strategic alliances with existing platforms, recognizing the potential for revenue growth. This collaboration between traditional banking institutions and online lending platforms indicates a paradigm shift in the financial landscape. According to a survey by Grand View Research, online lending is expected to continue its upward trend at a rate of 19.5% by 2027, reflecting its increasing popularity worldwide.^[1]

Credit Lending Models

Fintech has transformed finance, with the emergence of new firms challenging traditional banks in lending, payments, and investment. Many seek partnerships with banks to expand, share risks, and navigate compliance. Meanwhile, banks are eager to enter marketplace lending, either by building their infrastructure or partnering with existing platforms. Let’s explore three types of credit lending models.

Traditional Bank Lending Model

In the traditional bank model, banks collect money from savers, pay them interest, and lend that money to borrowers at higher interest rates. Banks make profits from the difference and manage risks by keeping money in reserve to cover potential losses. Savers don't have much say in how their money is used. Banks also match short-term deposits with longer-term loans, needing a backup fund for emergencies.

Bank-Fintech Partnership Model

The Bank-Fintech Partnership is a collaboration where traditional banks and fintech firms join forces to enhance financial services. Fintechs bring tech solutions like lending automation, and digital payments, while banks offer their established customer base and infrastructure. Together, they innovate, share resources, and improve services, staying competitive in a changing market.

Marketplace Lending Model

The marketplace lending model changes how people and businesses borrow and lend. Online platforms link borrowers directly with investors, bypassing banks. This makes it easier for borrowers to obtain loans quickly, unlike traditional banks’ slower processes. Investors can diversify their investments across different types of loans and risks, earning returns through interest and repayments. Advanced algorithms analyze various data, not just credit scores, to determine who receives loans, making lending more fair and granting more people access to credit.

How to invest with marketplace lending

To invest in a marketplace lending platform, it is essential to consider several key factors to ensure that you choose a reputable and suitable platform for your investment needs. Here are some important steps to guide you in selecting a marketplace lending platform:

Step	Key Consideration	Explanation
1.	Regulation	Make sure that the platform is regulated by a financial authority to guarantee adherence to best practices and regular checks.
2.	Loan Terms	Check the platform’s loan terms, including minimum loan amounts, investment durations, or repayment terms to ensure they align with your requirements.
3.	Interest Rates	Compare interest rates from different platforms to find competitive rates and determine if they offer fixed or variable rates.
4.	Fees	Be aware of any fees charged by the platform, such as origination fees, late payment fees, or prepayment penalties, to understand the total cost of borrowing.
5.	Reputation	Research the reputation of the platform by reading reviews from other users and looking for any red flags that might indicate a less reputable company.
6.	Borrower and Lender Protections	Understand how the platform protects both borrowers and lenders, ensuring transparency and clear policies for loan transactions.

Marketplace Lending Examples

The online lending platform market is growing rapidly, with transactions expected to reach US$33.7 billion by 2025.^[2] This presents many opportunities, with several key marketplace lending platforms emerging. Let's explore three of the most influential platforms in this evolving market.

Mintos

Mintos is the leading global platform for investing in personal loans, having funded more than €10 billion worth of loans since its launch in 2015. Investors have the opportunity to purchase fractional ownership in debt notes, each containing 6 to 20 loans, sourced from over 60 partnering loan originators. Headquartered in Latvia, AS Mintos Marketplace is licensed as both an investment firm and a payment service provider by the Latvian Financial and Capital Market Commission (FCMC), and complies with MiFID II regulations in the European Union.^[3] At Mintos, participants can make investments starting from €50. Additionally, investors can set up an auto-invest feature and trade loans on a secondary market.^[4]

PeerBerry

PeerBerry, a Croatian platform under Aventus Group, facilitates debt investments in real estate, loans, leasing, and business ventures across Europe, CIS, and Asia. Acting as an intermediary, it connects investors to Aventus Group's loans via various originators. Investors engage with PeerBerry, which then lends to Aventus Group. Launched in 2017, it amassed over €2.5 billion, with a monthly average of €69.82 million.^[5] The platform boasts a community of 81,712 investors.^[6] Operating as an investment bridge, PeerBerry links investors with Aventus Group's loan portfolio through its network of originators, offering diverse investment opportunities.

TWINO

TWINO has emerged as a prominent global lending platform, managing over €1 billion in loans.^[7] It offers debt notes from four originators across Poland, Latvia, Vietnam, and the Philippines, along with short-term rental property loans in Latvia. Boasting more than 58,000 investors, it averages €2.5 million in monthly investments. Investors can start with just €1, choosing from various loans provided by TWINO Group’s subsidiaries, including Netcredit (Poland), Moneza (Latvia), and Vamo (Vietnam, Philippines). TWINO guarantees loan buyback if repayments are 60 days late.^[8] The platform also offers automated investing, a secondary market, and operates under the Bank of Latvia's supervision as a licensed brokerage firm.

Pros of Marketplace Lending

Marketplace lending connects borrowers directly with investors, cutting out traditional financial intermediaries. This approach offers numerous benefits for both investors and borrowers.

Investors

Borrowers

Diversification: Investors can spread their risk by investing in multiple loans.

Access to Funding: Borrowers, especially those with limited options, can access funding.

Higher Returns: Marketplace lending can offer higher returns compared to traditional investments.

Less Stringent Eligibility Criteria: Borrowers with less-than-perfect credit may still qualify for loans.

Transparency: Investors have access to detailed loan information, enabling informed investment decisions.

Simplified Application Process: Borrowers can often complete the application process online with ease.

Passive Income: Investors can generate passive income from interest payments on their loan investments.

Quick Funding: Marketplace lending platforms often provide faster funding compared to traditional lenders.

Reduced Costs: Investors can avoid intermediaries and associated fees.

Flexibility: Borrowers may have more flexibility in terms of loan amounts and repayment options.

Cons of Marketplace Lending

Marketplace lending has gained popularity as an alternative to traditional banking. However, both investors and borrowers need to be aware of the potential drawbacks, which are summarized in the table below.

Investors

Borrowers

Default Risk: Marketplace lending carries the risk of borrower defaults, which can lead to financial losses for investors if borrowers fail to repay their loans.

Higher Interest Rates: Borrowers may face higher interest rates compared to traditional banking options. This can particularly affect individuals with lower credit scores or higher risk profiles.

Lack of Regulation: Marketplace lending is a relatively new industry with less robust regulation compared to traditional financial institutions. This can increase the risk of fraudulent activities or inadequate assessments of borrower creditworthiness.

Limited Access to Credit: Marketplace lending platforms typically have eligibility criteria that borrowers must meet. Borrowers who do not meet these criteria may have limited access to credit through these platforms.

Platform Risk: Investors rely on marketplace lending platforms to facilitate loan transactions. If a platform faces financial difficulties or fails, investors may encounter challenges in recovering their investments.

Potential for Predatory Lending: In certain cases, marketplace lending platforms may engage in predatory lending practices, such as charging excessive fees or offering loans with unreasonable terms. Borrowers should carefully review loan agreements to ensure they understand the terms and conditions.

Limited Control and Transparency: Investors often have limited control over the selection of individual borrowers and the terms of loans. Some marketplace lending platforms lack transparency, making it difficult for investors to assess the quality and risk associated with specific loans.

Lack of Relationship Banking: Unlike traditional banks, marketplace lending platforms often do not offer additional banking services or the opportunity to build long-term relationships. Borrowers may miss out on the benefits of personalized advice or access to other financial products that come with a relationship with a traditional financial institution.

What is the difference between traditional credit lending and marketplace lending?

Traditional credit lending and marketplace lending are two different ways of offering loans, each with unique features and processes. Here's how they compare:

Aspect	Traditional Credit Lending	Marketplace Lending
Lending Model	Banks and financial institutions directly lend money to borrowers.	Platforms connect borrowers with investors.
Borrower Base	Individuals, businesses, institutions.	Individuals, small businesses.
Risk Assessment	Relies on credit scores, collateral, and financial history.	May use alternative data sources, and algorithms.
Interest Rates	Determined by the lending institution.	Determined by supply and demand on the platform.
Regulatory Environment	Subject to comprehensive regulations.	Regulatory oversight may vary, often less stringent.
Flexibility and Speed	The approval process may be time-consuming, and bureaucratic.	Often offers faster, streamlined approval processes.

Article Source

Finance Magnates: “The Growth of P2P Lending Platforms – Will It Continue in 2023?”
Statista: “CrowdLending (Business) - Worldwide”
P2PMarketData: “Mintos - Statistics”
Mintos: “Mintos Help Center”
P2PMarketData: “PeerBerry - Statistics"
PeerBerry: “PeerBerry in Numbers”
P2PMarketData: “TWINO - Statistics”
TWINO: “What is the difference between the BuyBack Guarantee and the Payment Guarantee?”