Consumer Crowdlending: From Niche to Mass Market

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Consumer crowdlending or p2p consumer lending covers unsecured loans to private individuals funded by either individuals or institutional funders. The loans can have a high variety of possible uses, such as loans for cars, refinancing, travel, wedding, or student loans.

Other types of personal crowdlending can be distinguished from consumer crowdlending by having securities behind the loan. This could be mortgage lending that involves lending money to the purchase of a home or pawn brokering lending that can involve any asset that can function as security for the loan.

The Market of Consumer Crowdlending

According to the most comprehensive investigation of the market for peer-to-peer financing, The 4th European Alternative Finance Benchmarking Report by the Cambridge Centre for Alternative Finance (2019), p2p consumer lending is the largest of all types of alternative financing/crowdinvesting. The latest data available to the researchers are from 2017 where p2p consumer lending had a volume of €1,392.38m, which amounted to a market share of 41%. Consumer crowdlending was followed by Invoice Trading (16%), P2P Business Lending (14%), Real Estate Crowdfunding (8%), Equity-based Crowdfunding (6%) and Reward-based Crowdfunding (5%). For a thorough explanation of the different types of crowdinvesting visit this article where you can learn about the difference between lending and equity crowdinvesting as well as the most important types of crowdinvesting in 2019.

Since the first European Alternative Finance Benchmarking Report was published in 2013, consumer crowdlending has been the top volume driver in Europe. While most other alternative financing models have maintained their proportional market share each year, p2p consumer lending has increased its market share from 34% in 2016 to 41% in 2017. At the same time, driving volumes in the Asia-Pacific and the Americas region, it was the largest of all types of crowdinvesting across the globe in 2017. This can especially be attributed to the strong position of consumer crowdlending in China where it had a market share of 63%. In terms of funding volume p2p consumer lending continues to show impressive growth rates and from 2016 to 2017 the market experienced a growth of 99.8% from €697m to €1,392m. According to the rapport, this growth can especially be ascribed to strong incumbent platforms increasing their international operations.

The Disruptive Force of P2P Consumer Lending

The business model of p2p lending is significantly different from that of traditional banks as peer-to-peer platform companies do not lend their own funds to the borrowers. Instead, p2p platforms match borrowers seeking a loan with investors looking for a return in the form of interest payments. This enables the platform companies to generate revenue in two ways: By charging an origination fee to the borrowers and/or taking a cut of the interest rate earned by lenders in the form of e.g. servicing fees. At the same time, borrowers benefit from the possibility of getting quick funding decisions, a streamlined application process, and easy access to the status of their loan, while lenders will generate income from the remaining interest that the borrower pays on the loan after a possible fee has been paid to the platform.

As the numbers presented above tell, consumer crowdlending is something that needs to be taken seriously by the banking community as a potential threat to their customer base. The main reason for this can be attributed to the low-cost structure associated with running a p2p platform compared to traditional banks offering the potential for the platform companies to offer attractive interest rates to borrowers. Also, online lending-based crowdfunding has the potential of providing a quicker and more efficient lending process by matching borrowers and investors directly. Compared to traditional banks, the online interface inherent to the business model of peer-to-peer platform companies has so far also enabled most platforms to provide a more simple and user-friendly experience for both borrowers and investors.

According to PricewaterhouseCoopers, peer-to-peer lending is driven by two of five megatrends shaping business: Technological breakthroughs and demographic shifts (PwC, 2015). Combined with a potent business model, a market showing rapid growth rates, and significant benefits for both borrowers and lenders, a paradigm shift in the business of consumer lending might already be on its way.

P2P Platforms Involved in Consumer Crowdlending

As of writing, 19 peer-to-peer platforms involved in consumer lending are sharing data with us (find them here). These are traditional three-party lending-based crowdfunding platforms involving a borrower, the p2p platform and a lender. Since 2009, another business model of p2p consumer lending has also gained momentum. This business model involves a fourth party, the loan originator. We have listed platforms using this business model as “Originators”.

Make sure you understand the risk structure of the two business models before you start investing by reading this illustrative overview of the pros and cons involved in the two different p2p lending business models.

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