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Peer to Peer Lending

By: Ray Cain
Published: March 2008


Peer to Peer LendingThis report is the first in-depth study of P2P lending and its potential impact on the financial services industry. It critically analyses the disruptive potential of the service in the context of both banking theory and practice and prevailing market realities. It discusses the business case for banks to enter the P2P lending space and the ways in which banks can compete with specific threats posed by P2P lending without engaging in the space directly.

The report uses exclusive case studies, data and interviews from institutions, players, users, bloggers and industry experts from 30 different countries.


To purchase this report, or to request a report summary or list of case studies, call Jeannie on +44 (0) 207 563 5640 or email

What is Peer to Peer Lending?

‘Peer-to-peer’, ‘person-to-person’ (P2P) lending is a means by which borrowers and lenders can transact directly without traditional financial intermediaries such as banks. P2P lending has two basic models; the ‘online marketplace’ model and the ‘friends and family’ model.

The Size of the Market

Some twenty P2P lending players worldwide have already originated over half-a-billion dollars in loans and a dozen more players are preparing to launch soon. With the buzz over social networking platforms such as MySpace and Facebook, P2P lending is receiving considerable media attention and has been featured in publications including The Economist, Time, Wall Street Journal, Forbes and Money. Jeremy Gutsche, who runs the website believes that P2P lending will be one of the key financial trends of 2008. A number of analysts predict that P2P lending will rapidly make inroads into the consumer loan market.

A Revolution in Financial Services?

The following is taken from the early version of a P2P lenders website and represents a clear call to arms for those disaffected with modern banking:

Banks have huge overheads, with thousands of employees to pay, hundreds of branches to feng shui, and countless fat cats to feed. And they take far more than their fair share of people’s money – last year, the Big Banks reported combined profits of over £30bn. By cutting out the banks with their huge overheads and large margins, both lenders and borrowers get better rates.”

Can P2P deliver on this radical agenda?

The report also includes a detailed assessment of existing and prospective P2P lending players. Financial institutions are feeling pressure to develop and implement innovative strategies to compete with the challenges provided by the electronic and mobile worlds and in particular the social networking phenomenon. However they face considerable uncertainty moving forward. In these vital early stages when critical decisions are being made, top executives will benefit from the comprehensive view of the industry and insights contained in the report.


To purchase this report, or to request a report summary or list of case studies, call Jeannie on +44 (0) 207 563 5640 or email


P2P lending has two basic models – the ‘online marketplace’ model and the ‘friends and family’ model. In the first, prospective borrowers post loan requests on the site and investors select loans to fund. In the second the P2P lending service formalises previously informal loans between friends, family members, and associates.

Over US$500 million in loans have been originated by over 20 P2P lending players worldwide. A dozen more players are planning to launch soon. Different players have different operating models and business models, and offer different partnership opportunities for banks.

While P2P lending has the potential to be a disruptive force in retail lending and deposit taking it faces significant challenges in realising this.

P2P lending has disruptive potential in that it allows individual borrowers and lenders to transact directly in what is essentially a bond market for consumer loans - enhancing efficiency and delivering better rates than financial institutions. However P2P marketplaces still have significant operating costs and complete with banks’ online delivery of loans and savings products. The greatest cost challenge is marketing. P2P players not only have to establish brand awareness and consumer trust as startups, they also have to persuade consumers to invest in a whole new asset class – and one which sounds risky, loans to people they do not know. To break into the mass market P2P players will need to make significant investments in marketing and brand building – a cost that their low fees may find difficult to absorb. P2P lending rates already struggle to compete with banks’ rates in many cases.

P2P lending also has disruptive potential in that it provides a more satisfying banking experience for customers. It offers more transparency and disclosure, gives consumers more control over how their funds are invested, and makes borrowing and lending a social experience. While these factors certainly have appeal, and constitute a powerful marketing message, they are not likely in themselves to attract mainstream consumers away from banks, especially if not accompanied by the prospect of solid financial gain.

P2P lending’s real disruptive potential lies in scaling relationship lending to cater to the ‘long tail’ of consumer lending – meeting the unique needs of customers not served by the standardised products and credit criteria of mainstream banks. Relationship lending relies on personal interaction and has traditionally been limited to the confines of local communities. The promise of P2P lending is to leverage online social networking tools to make relationship lending possible on a mass scale.

Tools used to achieve this include: the formation of a borrower-lender community; personalised loan listings; borrower groups; technologies to display the real world connections between lenders and borrowers; member endorsements; and online reputation scoring which aggregates feedback ratings from borrowers’ other online activities. While these tools have potential they are challenged by the anonymity of the internet and lack of verification of information provided by borrowers. So far they have only demonstrated limited ability to cater to those borrowers not served by mainstream banks. P2P players also offer a far more limited product and feature range than banks – especially when consumers can use financial comparison websites and online brokers to choose among the offerings of thousands of financial institutions.

While P2P players continue to experiment with these online relationship lending tools they are relying predominantly on transactional lending and focusing on prime borrowers. This approach has low margins and requires high volume to be profitable. Volume growth so far has been slow and there are no obvious drivers that are likely to hasten this. An important reason is that P2P lending is competing with banks using a product - the personal loan, which is not popular among its target market of prime borrowers who prefer the convenience of credit cards and can often get cheaper rates on secured loans. The main advantage of the installment loan is for credit card debt consolidation, yet the demand for this is strongest among subprime borrowers.

An alternative approach is the ‘field partner’ approach which blends online P2P lending with offline relationship lending. Field partners are loan officers who conduct credit screening and monitoring on behalf of lenders. The model is used successfully by P2P microfinance players and can also be applied to the subprime market. Experience shows that it offers higher returns for lenders and, by catering to unserved borrowers, gives greater social rewards also. It is an effective way of catering to the long tail of consumer lending and gives P2P players the opportunity to establish themselves in a niche which is currently neglected by banks.

Other hybrid models are also emerging which blend P2P lending and mainstream banking. Players have formed distribution partnerships with financial institutions, are blending individuals’ funds with bank funds in hybrid P2P/bank loans and are forming two way customer referral partnerships with banks. New players will increasingly turn to such approaches as they look for ways to overcome the challenge of competing with the incumbents on volume. First movers have a number of advantages in driving volume such as: free marketing through media publicity; acquisition of the early adopter market; network effects of a large base of borrowers and lenders; and the network effects of historical data on loan performance. For banks there are opportunities to acquire customers, earn commission income, and differentiate their products and brands, particularly among younger demographics.

There is not a strong case at present for banks to become P2P lending players themselves. As long as the transactional approach is used, banks can make more money lending funds and collecting deposits through their regular channels – generating interest income rather than fees. If P2P lending players succeed in reaching borrowers who are otherwise not served by banks then there may be a case for banks to enter the field – either directly or by participating as borrowers and lenders on an existing platform. Banks who are contemplating entering P2P lending must also consider the unique challenges and reputational risks associated with managing an online customer community and providing a service that puts customers’ funds at risk.

Even without engaging in P2P lending directly there are a number of things banks can do to compete with specific threats it might pose: improve operating efficiency to drive better prices; improve satisfaction through better customer service, step up community involvement and CSR initiatives; better serve the long tail with more product customisation and more flexible credit screening; and foster a more social banking experience through the use of web 2.0 tools.

Executive summary

Section I: Players

Chapter 1 Players in Operation
Chapter 2: Pre-launch or Inactive Players

Section II: P2P lending: A disruptive innovation in consumer lending?

Chapter 3 P2P lending as a disruptive innovation
Chapter 4: Delivering better rates through greater efficiency
Chapter 5: Offering a more satisfying customer experience
Chapter 6: Catering to the ‘Long tail’ of the consumer loan market
Chapter 7: Leveraging social networking tools to scale relationship lending

Section III: P2P Industry trends

Chapter 8: The trend towards transactional lending
Chapter 9: Hybrid models – blending P2P and traditional lending

Section IV: Bank responses to P2P lending

Chapter 10: The business case for banks
Chapter 11: Competing with P2P lending

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